Definitive Proxy Statement
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934 (Amendment No.     )

 

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      Preliminary Proxy Statement      
      Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
      Definitive Proxy Statement      
      Definitive Additional Materials      
      Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

AK STEEL HOLDING CORPORATION

 

 

(Name of Registrant as Specified In Its Certificate)

 

      

 

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CREATING INNOVATIVE STEEL SOLUTIONS AK STEEL NOTICE OF 2019 ANNUAL MEETING OF STOCKHOLDERS AND PROXY STATEMENT


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AK Steel Holding Corporation    Dr. James A. Thomson    Roger K. Newport

9227 CENTRE POINTE DRIVE

WEST CHESTER, OHIO 45069

   NON-EXECUTIVE CHAIR OF THE
BOARD
   CHIEF EXECUTIVE OFFICER

April 10, 2019    

 

  

Dear Fellow Stockholders:

  

It is our pleasure to invite you to the 2019 Annual Meeting of Stockholders of AK Steel Holding Corporation (“Annual Meeting”). The meeting will be held at 1:30 p.m., Eastern Time, on Thursday, May 23, 2019, and will be a webcast meeting of stockholders.

  

You will be able to attend the Annual Meeting, vote and submit your questions during the meeting via live webcast by visiting www.virtualshareholdermeeting.com/AKS2019. To participate in the meeting, you must have your sixteen-digit control number that is shown on your Notice of Internet Availability of Proxy Materials (the “Notice”) or on your proxy card if you receive the proxy materials by mail. You will not be able to attend the Annual Meeting in person. The Annual Meeting is being held on a virtual-only basis in order to facilitate participation by the broadest number of stockholders possible and to save costs relative to holding a physical meeting.

  

Attendance at the Annual Meeting is limited to stockholders of record as of the close of business on March 25, 2019, or their duly appointed proxies. We strongly encourage you to participate by voting your proxy in one of the methods explained in the Notice of Annual Meeting of Stockholders that you received in the mail.

 

 

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This year we have once again elected to furnish proxy materials to our stockholders on the Internet. We believe this allows us to provide our stockholders with the information they need in an accessible format, while lowering the costs of delivery and reducing the environmental impact of our Annual Meeting. Please review the instructions for each of your voting options as described in the Proxy Statement and the Notice.

  

Please read the Notice of Annual Meeting of Stockholders and Proxy Statement carefully. Your vote is important. The Board of Directors recommends that you vote your shares as follows for each proposal included in the Proxy Statement:

 

1.  FOR the election of each of the ten nominee Directors (Proposal No. 1).

 

2.  FOR the ratification of the appointment of Ernst & Young LLP as the independent registered public accounting firm for 2019 (Proposal No. 2).

 

3.  FOR the approval of Named Executive Officer compensation (Proposal No. 3).

 

4.  FOR the approval of the 2019 Omnibus Supplemental Incentive Plan (Proposal No. 4).

 

Please read the Notice of Annual Meeting of Stockholders and Proxy Statement carefully. Your vote is important.

  

On behalf of your Board of Directors, we thank you for your continued support. Your interest and investment in our company is greatly appreciated.

    

Sincerely,

  
    

 

 

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LOGO

 

 

 

     Dr. James A. Thomson    Roger K. Newport

 

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AK STEEL HOLDING CORPORATION

9227 Centre Pointe Drive

West Chester, Ohio 45069

 

 

NOTICE OF 2019 ANNUAL MEETING OF STOCKHOLDERS

OF AK STEEL HOLDING CORPORATION (THE “COMPANY”)

 

 

 

Date:

  

Thursday, May 23, 2019

Time:

  

The meeting will begin at 1:30 p.m., Eastern Time.

Place:

  

The Annual Meeting will be held virtually and can be accessed online at www.virtualshareholdermeeting.com/AKS2019. There is no physical location for the Annual Meeting.

Purposes:

  

1. To elect as Directors the ten candidates nominated by the Board;

  

2. To ratify, by a non-binding advisory vote, the Audit Committee’s appointment of Ernst & Young LLP as the independent registered public accounting firm for 2019;

  

3. To vote on a non-binding advisory resolution to approve the compensation of our Named Executive Officers;

4. To approve the 2019 Omnibus Supplemental Incentive Plan; and

  

5. To transact such other business as properly may come before the meeting.

Who Can Vote:

  

AK Steel stockholders of record as of the close of business on March 25, 2019.

How You Can
Vote:
  

You may vote in advance of the meeting via the Internet, by telephone, or by using the proxy card that will be enclosed with these materials (if you received a printed copy of the proxy materials). If you intend to use the proxy card, please mark, date and sign it, and then return it promptly in the postage-paid envelope that comes with the card. If you intend to vote over the telephone or via the Internet, please follow the instructions on the Notice or proxy card that you received (if you received a printed copy of the proxy materials). Your vote is important!

Right to Revoke
Your Proxy:
  

You may revoke your proxy at any time before the vote is taken at the virtual meeting. If you are a stockholder of record, you may change your vote by (1) granting a new proxy bearing a later date (which automatically revokes the earlier proxy) using any of the methods described above (and until the applicable deadline for each method); (2) providing a written notice of revocation to our Corporate Secretary at AK Steel Holding Corporation, 9227 Centre Pointe Drive, West Chester, OH 45069, prior to your shares being voted; or (3) participating in the virtual meeting and voting. Attendance at the virtual meeting will not cause your previously granted proxy to be revoked unless you vote at the meeting or specifically so request. For shares you hold beneficially in “street name”, you may change your vote by submitting new voting instructions to your broker, bank, trustee or nominee following the instructions they provided, or, if you have obtained a legal proxy from your broker, bank, trustee or nominee giving you the right to vote your shares, by attending the online meeting and voting.

Who May Attend:

  

We will be hosting the Annual Meeting live via the Internet. You will not be able to attend the Annual Meeting in person. Any stockholder can listen to and participate in the meeting live via the Internet at www.virtualshareholdermeeting.com/AKS2019. The webcast will start at 1:30 p.m. Eastern Time. You will need the sixteen-digit control number that is included on your Notice or your proxy card (if you received a printed copy of the proxy materials) to vote and submit questions while attending the meeting online. If you do not have your sixteen-digit control number, you will only be able to listen to the Annual Meeting.

Additional Details on Virtual Meeting Participation:   

Our goal for the Annual Meeting is to enable the broadest number of stockholders to participate in the meeting at the lowest cost to them, while providing substantially the same access and exchange with the Board and Management as an in-person meeting. As such, we believe that we observe best practices for virtual stockholder meetings, including by providing a support line for technical and other assistance, addressing as many stockholder questions as time allows, and by posting all questions and answers posed at the Annual Meeting on our website within a reasonable time. Accordingly, additional information on how you can participate in the virtual Annual Meeting to the fullest extent is set forth in the “Questions and Answers About the Proxy and Annual Meeting” section of this Proxy Statement, which begins on page 1.

By Authorization of the Board of Directors,

Joseph C. Alter, Corporate Secretary    

West Chester, Ohio

April 10, 2019

 

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TABLE OF CONTENTS

 

     Page

Proxy Summary

   i

Proxy Statement

   1

Proposal No. 1 — Election of Directors

   7

Corporate Governance

   19

Director Compensation

   31

Director Compensation Table

   33

Stock Ownership

   34

Sustainability and Corporate Responsibility

   36
Executive Compensation    41

Compensation Discussion and Analysis

   41

Management Development and Compensation Committee Report

   80

CEO Pay Ratio Calculation

   81

Summary Compensation Table

   82

Grants of Plan-Based Awards Table

   85

Outstanding Equity Awards at Fiscal Year-End Table

   87

Option Exercises and Stock Vested Table

   89

Pension Benefits Table

   90

Nonqualified Deferred Compensation Table

   92

Potential Payments Upon Termination or Change-of-Control

   93

Audit Committee Report

   101

Principal Accounting Firm Fees

   102

Proposal No. 2 — Advisory Vote to Ratify Appointment of Ernst  & Young LLP as the Independent Registered Public Accounting Firm for 2019

   103

Proposal No.  3 — Advisory Vote to Approve Named Executive Officer Compensation

   104

Proposal No. 4 — Approval of the 2019 Omnibus Supplemental Incentive Plan

   108

Stockholder Proposals for the 2020 Annual Meeting and Nominations of Directors

   116

Householding

   116

Other Matters

   117

 

 

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PROXY SUMMARY

This summary highlights information contained elsewhere in the Proxy Statement. This summary does not contain all of the information that you should consider and you should read the entire Proxy Statement before voting. For more complete information regarding our 2018 performance, please review our Annual Report on Form 10-K for the year ended December 31, 2018, a copy of which is available at the Investors section of our website at www.aksteel.com.

Voting Matters and Recommendation

 

 

     Our Board’s
Recommendation
 
  

 

 

 

 

 

  PROPOSAL 1. Election of Directors (page 7)

  

The Board and the members of the Nominating and Governance Committee believe that the ten Director nominees possess the necessary and preferred qualifications to provide effective oversight of the business and quality guidance and counsel to our Management to maximize long-term value for our stockholders.

    

FOR

each Director

Nominee

 

 

 

  PROPOSAL 2. Ratification of Ernst & Young LLP as Independent Registered Public Accounting Firm (page 103)

  

The Audit Committee and the Board believe that the continued retention of Ernst & Young LLP to serve as the Independent Registered Public Accounting Firm for the year ending 2019 is in our and our stockholders’ best interests. As a matter of good corporate governance, stockholders are being asked to ratify the Audit Committee’s selection of the independent registered public account firm. Ernst & Young has served as our auditor since 2013.

     FOR  

  PROPOSAL 3. Advisory vote to approve Named Executive Officer Compensation (page 104)

  

We seek a non-binding advisory vote from our stockholders to approve the compensation of our Named Executive Officers as described in the Compensation Discussion and Analysis (“CD&A”) section beginning on page 41. The Board values stockholders’ opinions and the Management Development and Compensation Committee will take into account the outcome of the advisory vote when considering future executive compensation decisions, as it has done each year since the inception of our annual advisory vote.

     FOR  

  PROPOSAL 4. Approval of the 2019 Omnibus Supplemental Incentive Plan (page 108)

  

We seek approval of a new 2019 Omnibus Supplemental Incentive Plan (“2019 Plan”). The 2019 Plan is described in detail in Proposal 4, beginning on page 108. The principal purposes for the new 2019 Plan include, among other things, the need for sufficient shares of common stock for the future grant of stock option, restricted stock, restricted stock unit and performance share awards. The Board believes that the 2019 Plan is in the best interests of the Company and our stockholders, as it will enable the continuation of the most important aspect of our compensation program – namely, to align Management’s compensation with our performance in order to incentivize the creation of long-term stockholder value.

     FOR  

 

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Governance Highlights

We are committed to the highest standards of corporate governance, which we believe promote the long-term interests of our business and maximize returns for our stockholders, while strengthening Board and Management accountability. The following are some highlights of our governance framework:

 

   

9 of 10 Director nominees are independent

   

Independent leadership of the Board through our Non-Executive Chair

   

All Committees comprised entirely of independent Directors

   

4 of 10 Director nominees (40%) are diverse in terms of gender, race and/or ethnicity

   

Annual election of Directors

   

Majority voting for Directors

   

Mandatory retirement age for Directors and Executive Officers

   

Robust risk oversight by the Board and its Committees

   

Pay-for-performance-based executive compensation program

   

Executive compensation clawback policy

   

Annual Board self-evaluation, including periodic use of third party evaluation facilitator

   

Annual Committee self-evaluations

   

Regular Executive Sessions of independent Directors

   

Bi-annual stockholder outreach program

   

Stock ownership guidelines for Directors and Executive Officers

   

Majority of Director compensation in the form of restricted stock units

   

Policy prohibiting insider trading, hedging transactions and pledging of securities by any employee or Director

   

Proxy access rights – our By-laws include proxy access provisions permitting eligible stockholders to include in our proxy statement nominees for election to our Board.

 

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Director Nominee Snapshot

Set forth below is a summary of relevant biographical information for each of our Director nominees.

 

 

 

Name   Age     Director
Since
    Independent   Primary Occupation  

Committee

Memberships(1)

  Other
Public
  Boards  

 

 

 

 

 

 

 

   

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 Dennis C. Cuneo

 

 

 

 

69

 

 

 

 

 

 

2008

 

 

 

 

Yes

 

 

Partner, Fisher & Phillips, LLP; President, DC Strategic Advisors, LLC

 

 

 

CS (Chair), N&G

 

 

1

 

 Sheri H. Edison

 

 

 

 

62

 

 

 

 

 

 

2014

 

 

 

 

Yes

 

 

Senior Vice President, Chief Legal Officer and Secretary, Bemis Company, Inc.

 

 

MD&C, N&G

 

 

0

 

 Mark G. Essig

 

 

 

 

61

 

 

 

 

 

 

2013

 

 

 

 

Yes

 

 

President and Chief Executive Officer, Phoenix Services LLC

 

 

 

Audit, Finance (Chair)

 

 

0

 

 William K. Gerber

 

 

 

 

65

 

 

 

 

 

 

2007

 

 

 

 

Yes

 

 

Managing Director, Cabrillo Point Capital LLC

 

 

 

Audit (Chair), Finance

 

 

1

 

 Gregory B. Kenny

 

 

 

 

66

 

 

 

 

 

 

2016

 

 

 

 

Yes

 

 

Retired Chief Executive Officer & President of General Cable Corporation

 

 

 

Finance, CS

 

 

2

 

 Ralph S. Michael, III

 

 

 

 

64

 

 

 

 

 

 

2007

 

 

 

 

Yes

 

 

Chairman, Fifth Third Bank, Greater Cincinnati Region

 

 

 

Finance, MD&C (Chair)

 

 

1

 

 Roger K. Newport

 

 

 

 

54

 

 

 

 

 

 

2016

 

 

 

 

No

 

 

Chief Executive Officer, AK Steel Holding Corporation

 

 

 

None

 

 

1

 

 Dwayne A. Wilson

 

 

 

 

60

 

 

 

 

 

 

2017

 

 

 

 

Yes

 

 

Retired Senior Vice President, Fluor Corporation

 

 

 

N&G, CS

 

 

1

 

 Vicente Wright

 

 

 

 

66

 

 

 

 

 

 

2013

 

 

 

 

Yes

 

 

Retired President and Chief Executive Officer, California Steel Industries

 

 

 

Audit, CS

 

 

0

 

 Arlene M. Yocum

 

 

 

 

61

 

 

 

 

 

 

2017

 

 

 

 

Yes

 

 

Retired Executive Vice President and Managing Executive of Client Service, PNC Asset Management

 

 

Audit, MD&C

 

 

0

 

  (1)

MD&C = Management Development and Compensation Committee; N&G = Nominating and Governance Committee; CS = Corporate Sustainability Committee (formerly the Public and Environmental Issues Committee)

 

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Director Average Age and Average Board Tenure Snapshot

The below charts provide the respective ages and tenures of service for each of our Director nominees, in addition to the average age and tenure.

 

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Director Skill/Experience Snapshot

Set forth below is information for each of our Director nominees detailing their tenure and skills and illustrating the high level of experience and expertise each brings to the Board. The Director nominees are presented in order of their respective mandatory retirement dates under the Board’s mandatory retirement age policy of 74 years.

 

 

2019 AK Steel Board of Directors

         Skills/Experience Matrix        

 

 
             

 

  Director

 

 

 

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  Board Tenure                                                                                
  Year of Election     2008       2016       2013       2007       2007       2014       2013       2017       2017       2016  
  Mandatory Retirement Date     2024       2026       2027       2028       2029       2032       2032       2032       2033       2038  
  Compliance                                
  Independent (NYSE)     yes       yes       yes       yes       yes       yes       yes       yes       yes       no  
  Outside Director (IRS § 162m)     yes       yes       yes       yes       yes       yes       no       yes       yes       no  
  Non-employee Director     yes       yes       yes       yes       yes       yes       yes       yes       yes       no  
  Financially Literate (NYSE)     yes       yes       yes       yes       yes       yes       yes       yes       yes       n/a  
  Audit Comm. Financial Expert     n/a       n/a       yes       yes       n/a       n/a       yes       yes       n/a       n/a  
  Industry Experience                                
  Present CEO or Executive                                     x       x       x                       x  
  Past CEO         x       x               x         x      
  Executive Officer (past or present)     x       x       x       x       x       x       x       x       x       x  
  Steel Industry           x             x       x             x  
  Manufacturing or Related     x       x       x               x               x               x          
  Operations (including P&L)         x       x         x         x       x       x       x  
  International Business / Trade     x       x       x       x       x       x       x       x       x       x  
  Mergers and Acquisitions     x       x       x       x       x       x       x       x       x       x  
  Environmental or Energy     x               x               x               x       x       x          
  Specialty Skills / Experience                                
  U.S. Public Company Board     x       x       x       x       x       x       x       x       x       x  

  Audit / Finance Committee (U.S.

  Public Company)

   

 

x

 

 

 

   

 

x

 

 

 

   

 

x

 

 

 

   

 

x

 

 

 

   

 

x

 

 

 

   

 

x

 

 

 

   

 

x

 

 

 

   

 

x

 

 

 

           

 

x

 

 

 

  Compensation Committee (U.S.

  Public Company)

   

 

x

 

 

 

   

 

x

 

 

 

       

 

x

 

 

 

   

 

x

 

 

 

   

 

x

 

 

 

   

 

x

 

 

 

   

 

x

 

 

 

   

 

x

 

 

 

   

  Governance Committee (U.S.

  Public Company)

           

 

x

 

 

 

           

 

x

 

 

 

           

 

x

 

 

 

                   
x
 
       
  Finance/Accounting/Audit     x       x       x       x       x       x       x       x           x  
  Legal     x                                       x               x                  
  Human Resources     x         x               x            
  Technology/Engineering                     x                                               x          
  Communications/Pub. Relations     x         x             x                 x  
  Governmental Affairs     x               x                       x                               x  

  Diversity (ethnicity, gender,

  race, etc.)

                   

 

x

 

 

 

                   

 

x

 

 

 

           

 

x

 

 

 

   

 

x

 

 

 

       

Management Development and Compensation Committee’s Executive Compensation Philosophy

Pay-for-performance is the foundational principle of our executive compensation program. Our compensation philosophy, as shaped by the Management Development and Compensation Committee and approved by the Board, is that an executive compensation program should strengthen the commonality of interests between Management and our stockholders, while at the same time enabling us to attract, motivate and retain executives of high caliber and ability who will drive our

 

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success. Consistent with that objective, the Committee believes that a significant portion of the overall compensation package for each of our Executive Officers should be performance-based, including performance-based vesting provisions for a significant portion of the equity incentives awarded to each Executive Officer. The Committee believes that a well-designed executive compensation program also includes both annual and long-term performance incentives. The Committee further believes that our compensation program should be designed to reward superior performance and to provide financial consequences for subpar performance.

As illustrated below, for 2018, 69% of the CEO’s target total direct compensation was performance-based and 64% of the other NEOs’ average target total direct compensation was performance-based.

 

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Overview of 2018 Executive Compensation

Set forth below is the 2018 compensation for each Named Executive Officer as determined under Securities and Exchange Commission (“SEC”) rules, plus an additional, final column, entitled “Total Not Including Change in Pension Value.” The amounts reported in this final column may differ substantially from, and are not a substitute for, the amounts reported in the “SEC Total” column. The amounts reported in the final column are solely intended to facilitate a stockholder’s understanding of how changes in pension value impact the total compensation reported in the Summary Compensation Table in any given year. To facilitate that understanding, this column shows total compensation without pension value changes. See the 2018 Summary Compensation Table and the accompanying notes to the table beginning on page 82 for more information.

 

Name and Principal Position   Salary     Bonus     Stock
Awards
    Option
Awards
    Non-
Equity
Incentive
Plan
Compen-
sation
    Change in
Pension
Value and
Nonqualified
Deferred
Compen-
sation
Earnings
    All Other
Compen-
sation
    SEC Total     Total Not
Including
Change in
Pension
Value
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Roger K. Newport

  $ 950,000     $         0     $ 2,337,269     $ 1,010,944     $ 4,204,637     $ 3,729,492     $ 86,932     $ 12,319,574     $ 8,589,782  

Chief Executive Officer

                 

 Kirk W. Reich

    750,000       0       920,455       347,871       2,714,336       1,808,660       63,203       6,604,525       4,795,865  

President and Chief Operating Officer

                 

 Jaime Vasquez

    475,000       0       590,543       243,402       1,328,733       840,419       41,764       3,519,861       2,679,442  

Vice President,
Finance and Chief Financial Officer

                 

 Joseph C. Alter

    400,000       0       301,787       111,290       974,168       19,811       43,979       1,851,035       1,831,224  

Vice President,
General Counsel and Corporate Secretary

                 

Scott M. Lauschke

    325,000       0       199,466       69,646       764,538       0       43,382       1,402,032       1,402,032  

Vice President, Sales and Customer Service

                 

 

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Sustainability and Corporate Responsibility Highlights

We are committed to operating in a sustainable manner and being a responsible corporate citizen for the benefit of our customers, investors, employees, environment and the communities in which we live and work. We view sustainability as a key part of our strategy to maximize long-term shareholder value, as we believe that operating responsibly and providing products that help our customers achieve their sustainability goals provides us opportunities to grow our business; increase customer collaboration and loyalty; reduce our use of energy and natural resources; attract, retain and motivate employees; and differentiate us from our steel and non-steel competitors. In April 2019, we issued our 2018 Sustainability Report, which provides significantly increased disclosure and transparency regarding our corporate-wide sustainability efforts. We also disclose our steelmaking operations’ energy and water usage, emissions, waste generation and targets for reducing our environmental footprint. In addition, our Sustainability Report includes our scope 1 greenhouse gas (“GHG”) emissions, which are generally direct emissions from owned or controlled sources, and reduction targets for those emissions. Our Sustainability Report (which is not incorporated into this Proxy Statement) can be found in the “Corporate Citizenship” section of our website at https://www.aksteel.com/about-us/corporate-citizenship/sustainability. The following are some highlights of our sustainability program:

 

 Direct Oversight by the Corporate Sustainability Committee of the Board.

 

 Outperformed the domestic steel industry average in Occupational Safety and Health Administration (“OSHA”) recordable injury frequency for eleven consecutive years.

 

 Tremendous volume of recycled material—steel is the most recycled material on the planet.

 

 Another strong year for both air and water permit compliance.

 

 All steelmaking plants have ISO 14001 environmental management certification

 

 Committed to enhanced greenhouse gas emissions disclosure and targeted emissions reductions.

  

 Participating in research and development to advance technology, processes and approaches to reduce GHG emissions during the steelmaking process.

 

 Educating stakeholders that the production phase of steelmaking is less carbon-intensive than the processes for producing certain other competing materials, such as aluminum.

 

 Producing innovative steel solutions to further the sustainability goals of many of our automotive and other customers, including reduced GHG emissions and energy consumption.

 

 Contributing to our communities and being a responsible corporate citizen through the AK Steel Foundation, employee volunteer actions through AK Cares and other philanthropic programs.

 

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Conformance with ISG Principles

One component of our corporate governance program is ensuring that we are responsive to our stockholders’ perspectives in terms of governance best practices. As part of this effort, the Nominating and Governance Committee and the Board evaluate our governance practices against key institutional frameworks. Among these frameworks are the Corporate Governance Principles for U.S. Listed Companies promulgated by the Investor Stewardship Group (“ISG”). ISG is a collective of some of the largest U.S.-based institutional investors and global asset managers, along with several of their international counterparts. As of the date of this Proxy Statement, ISG publicly discloses that its members cumulatively invest over $31 trillion in the U.S. equity markets. The following chart summarizes these ISG Corporate Governance Principles and our conformance with and commitment to each principle.

 

    

ISG Principles

 

  

 

Implemented
by AK Steel

 

 

Highlights of AK Steel Commitment to
Principles

 

    Principle 1    

 

 

Board Accountability

  

 

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•  Annual Board elections for all Directors

•  Majority voting and tendered resignation upon failure to receive majority of votes cast

•  Proxy access By-laws

•  Extensive disclosure of corporate governance and Board practices

 

    Principle 2

 

 

Voting Rights Proportional

to Economic Interest

  

 

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•  One share, one vote

•  No disparate voting rights

    Principle 3

 

 

Responsiveness to Shareholder Proposals

  

 

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•  Stockholder outreach program

•  Track record of responsiveness to stockholder feedback and proposals

•  Independent Directors available to directly engage with stockholders

    Principle 4

 

 

Strong, Independent Leadership Structure

  

 

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•  Independent Chairperson with clearly defined and robust leadership role

•  All Committees chaired by and comprised of independent Directors

•  Regular “executive sessions” of the Board and Committees with independent Directors only

•  Board periodically reviews leadership structure

    Principle 5

 

 

Board Structure that Enhances Effectiveness

  

 

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•  Nine of ten Directors are independent

•  Experienced, well-rounded, diverse Board membership

•  Appropriate Committees and high level of attendance

•  Direct Board and Committee dialogue with, and participation by, independent auditors and mid-level Management

•  Robust annual self-evaluations by the Board and each Committee, including periodic use of an outside third-party facilitator

    Principle 6

 

 

Long Term, Logical Management Incentive Structures

  

 

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•  Combination of short- and long-term performance goals, with reasonable cash and equity mix, under Management compensation program

•  Pay-for-performance compensation program with incentives linked to sustainable economic value creation

•  Compensation plans clearly and fully disclosed

 

 

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AK STEEL HOLDING CORPORATION

9227 Centre Pointe Drive

West Chester, Ohio 45069

 

 

 

 

PROXY STATEMENT

 

We are furnishing this Proxy Statement in connection with the solicitation by the Board of Directors of AK Steel Holding Corporation (the “Company,” “AK Steel,” “us,” “we,” or “our”) of proxies to be voted at the 2019 Annual Meeting of Stockholders (“Annual Meeting”) to be held on May 23, 2019, at 1:30 p.m. Eastern Time via live webcast at www.virtualshareholdermeeting.com/AKS2019, and at any and all postponements or adjournments thereof.

On or about April 10, 2019, we mailed to stockholders of record a notice containing instructions on how to access our 2019 Proxy Statement and 2018 Annual Report to Stockholders on the Internet and on how to vote online. That notice also contains instructions on how you can receive a paper copy of the Proxy Statement and Annual Report to Stockholders via the United States mail or an electronic copy via e-mail if you prefer either of those alternatives.

QUESTIONS AND ANSWERS ABOUT THE PROXY AND ANNUAL MEETING

 

1.   Why is the Annual Meeting being webcast?

The Annual Meeting is being held on a virtual-only basis in order to enable participation by the broadest number of stockholders possible and to save costs compared to a physical meeting, particularly in view of the very low in-person attendance at Annual Meetings for many years leading up to our decision to hold virtual-only meetings (typically no more than a dozen individuals not associated with Management or the Board attended the meeting). In addition, a virtual meeting saves time and travel expense for our stockholders compared to a physical meeting. We are one of many prominent Delaware publicly-traded companies that have held virtual-only meetings and, as such, we are confident in the technology and believe that it enables stockholders to participate in the Annual Meeting more easily. In recent years, we have held the Annual Meeting of Stockholders as a virtual-only meeting and found it to be efficient and convenient for our stockholders.

 

2.   How can I participate and ask questions at the Annual Meeting?

We are committed to ensuring that our stockholders have substantially the same opportunities to participate in the virtual Annual Meeting as they would at an in-person meeting. In order to submit a question at the Annual Meeting, you will need your 16-digit control number that is printed on the Notice or proxy card that you received in the mail, or via email if you have elected to receive material electronically. You may log in 15 minutes before the start of the Annual Meeting and submit questions online. You will be able to submit questions during the Annual Meeting as well. We encourage you to submit any question that is relevant to the business of the meeting. All appropriate questions asked during the Annual Meeting will be read and addressed during the meeting. All questions and answers will be available on our website at www.aksteel.com in the “Investors” section, as soon as practicable following the Annual Meeting and retained until the next Annual Meeting. Stockholders are encouraged to log into the webcast at least 15 minutes prior to the start of the meeting to test their internet connectivity.

 

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3.   What if I have technical or other “IT” problems logging into or participating in the Annual Meeting webcast?

We have provided a toll-free technical support “help line” that can be accessed by any stockholder who is having challenges logging into or participating in the virtual Annual Meeting. If you encounter any difficulties accessing the virtual meeting during the check-in or meeting time, please call the technical support line number that will be posted on the Virtual Shareholder Meeting login page.

 

4.   What is a “proxy?”

A proxy is a person or entity authorized to act for another person. In this instance, the Board of Directors has appointed a Proxy Committee to vote the shares represented by proxy forms submitted by stockholders to us prior to the Annual Meeting. Giving the Proxy Committee your proxy means that you authorize the Proxy Committee to vote your shares on your behalf at the Annual Meeting as you specifically instruct on your proxy card for each proposal, or if a matter that is not raised on the proxy card comes up for a vote at the Annual Meeting, in accordance with the Proxy Committee’s best judgment.

 

5.   Whom am I appointing as my proxy?

The Proxy Committee consists of Roger K. Newport, our Chief Executive Officer; Kirk W. Reich, our President and Chief Operating Officer; and Joseph C. Alter, our Vice President, General Counsel and Corporate Secretary.

 

6.   What is a Proxy Statement?

The document you are reading is a Proxy Statement. It is intended to provide our stockholders with information necessary to vote in an informed manner on matters to be presented at the Annual Meeting. It is sent in conjunction with a solicitation of your proxy.

 

7.   Why did I receive more than one Proxy Statement or proxy card?

You may receive more than one Proxy Statement or proxy card if you hold our stock in different ways (e.g., joint tenancy, in trust, or in a custodial account) or in multiple accounts.

 

8.   Why are you soliciting my proxy?

The Board of Directors is soliciting your proxy to vote at the Annual Meeting because, at the close of business on March 25, 2019, the record date, you were: (1) a “stockholder of record,” which means that you were shown on our records as the owner of our common stock, or (2) the beneficial owner of shares held in street name. All stockholders of record are entitled to vote at the meeting. It is important that as many stockholders as possible vote on the issues to be decided at the Annual Meeting. The process of soliciting proxies is intended to increase the number of stockholders who vote on those issues. In addition, stockholders who vote by proxy are deemed to be in attendance at the meeting for purposes of determining if there is a quorum.

 

9.   What is the difference between a “stockholder of record” and a beneficial owner of shares held in “street name?”

Stockholder of Record. If your shares are registered directly in your name with our transfer agent, Computershare Investor Services, LLC (“Computershare”), you are considered the stockholder of record of those shares.

Beneficial Owner of Shares Held in Street Name. If your shares are held in an account at a bank, broker or other institution, then you are the “beneficial owner” of shares held in “street name.” The entity holding your account is considered the stockholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to instruct that entity on how to vote the shares held in your account.

 

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10.   How do I obtain voting instructions if my stock is held in “street name?”

If your stock is held in “street name,” you will receive a notice, typically entitled “Voting Instruction Form” or something similar, either electronically or by mail from the bank, broker or other institution holding your stock. This notice contains instructions regarding how to access the proxy materials and how to vote.

 

11.   If I hold my stock in street name and fail to provide specific voting instructions to the bank, broker or other institution holding it on my behalf, will my stock still get voted?

Not on all matters. If you hold your shares in street name and want a vote to be cast on your behalf for all proposals described in this Proxy Statement, you must submit your specific voting instructions to the bank, broker or other institution holding the stock on your behalf in response to the notice you receive from it.

 

12.   If I hold my stock in street name and do not provide specific voting instructions to the bank, broker or other institution holding it on my behalf, for which proposals will a vote not be cast on my behalf?

If you are a holder of shares in street name and you fail to provide specific voting instructions to the bank, broker or other institution holding the stock on your behalf, a vote will not be cast on your behalf with respect to the following proposals:

 

   

the election of Directors (Proposal No. 1);

 

   

the advisory vote on Named Executive Officer compensation (Proposal No. 3); and

 

   

the approval of the 2019 Omnibus Supplemental Incentive Plan (Proposal No. 4).

 

13.   If I hold my stock in street name and do not provide specific voting instructions to the bank, broker or other institutions holding it on my behalf, for which proposals may a vote be cast on my behalf?

If you are a holder of shares in street name and you fail to provide specific voting instructions to the bank, broker or other institution holding the stock on your behalf, that entity may cast a vote on your behalf only with respect to the ratification of the appointment of the independent registered public accounting firm (Proposal No. 2).

 

14.   What are “broker non-votes” and how are they counted for voting purposes?

“Broker non-votes” occur when a broker (or a bank or other institution holding someone’s shares) returns a proxy, but does not vote the shares represented by that proxy on a particular proposal, usually because the beneficial owners of those shares have not provided direction to the holder on how to vote them and the holder does not have discretionary voting power with respect to the proposal. Broker non-votes do not count for voting purposes, but are considered “present” at the meeting and are counted to determine whether there is a quorum present at the meeting.

 

15.   What documentation must I provide to be admitted to the online Annual Meeting and how do I attend?

If your shares are registered in your name, you will need to provide your sixteen-digit control number included on your Notice or your proxy card (if you receive a printed copy of the proxy materials) in order to be able to participate in the meeting. If your shares are not registered in your name (if, for instance, your shares are held in “street name” for you by your broker, bank or other institution), you must follow the instructions printed on your Voting Instruction Form. In order to participate in the Annual Meeting, please log on to www.virtualshareholdermeeting.com/AKS2019 at least 15 minutes

 

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prior to the start of the Annual Meeting to provide time to register and download the required software, if needed. The webcast replay will be available at www.virtualshareholdermeeting.com/AKS2019 until the 2020 Annual Meeting of Stockholders. If you access the meeting but do not enter your control number, you will be able to listen to the proceedings, but you will not be able to vote or otherwise participate.

 

16.   What documentation must I provide to vote online at the Annual Meeting?

If you are a stockholder of record and provide your sixteen-digit control number when you access the meeting, you may vote all shares registered in your name during the Annual Meeting webcast. If you are not a stockholder of record as to any of your shares (i.e., instead of being registered in your name, all or a portion of your shares are registered in “street name” and held by your broker, bank or other institution for your benefit), you must follow the instructions printed on your Voting Instruction Form.

 

17.   Is there any way for me to vote my shares other than during the webcast of the Annual Meeting?

Yes. If you are a stockholder of record, you may vote over the telephone or via the Internet in advance of the Annual Meeting. Our proxy card that you received in the mail contains instructions for voting by these methods. If you hold your shares in street name, you must follow the instructions contained in the Voting Instruction Form provided to you by the broker, bank or other institution holding your shares on your behalf.

 

18.   Do I vote only once regardless of how many shares I own? If not, how many votes do I get to cast?

You are entitled to one vote for each share of our common stock that you held as of the close of business on March 25, 2019.

 

19.   How do I submit a question at the Annual Meeting?

If you would like to submit a question during the Annual Meeting, once you have logged into the webcast at www.virtualshareholdermeeting.com/AKS2019, simply type your question in the “ask a question” box and click “submit”.

 

20.   When should I submit my question at the Annual Meeting?

Each year at the Annual Meeting we hold a question-and-answer session following the formal business of the meeting during which stockholders may submit questions to us. We anticipate having such a question-and-answer session at the 2019 Annual Meeting. You can submit a question up to 15 minutes prior to the start of the Annual Meeting and up until the time we indicate that the question-and-answer session is concluded. However, we encourage you to submit your questions before or during the formal business portion of the meeting and our prepared statements, in advance of the question-and-answer session, in order to ensure that there is adequate time to address questions in an orderly manner.

 

21.   What is a quorum and why is it important?

In the context of the Annual Meeting, a quorum is the presence at the meeting, either virtually or by proxy, of stockholders holding the minimum number of shares of stock necessary to make the proceedings of that meeting valid under our By-laws and applicable law. More specifically, the presence of stockholders at the meeting, virtually or represented by proxy, holding a majority of our issued and outstanding shares constitutes a quorum. As of March 25, 2019, there were 316,307,945 issued and outstanding shares of our common stock, which is the only class of stock outstanding. The number of shares necessary to constitute a quorum in the context of the Annual Meeting is 158,153,973.

 

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22.   What are my choices when voting on a particular proposal?

You may vote “FOR”, “AGAINST” or “ABSTAIN” with respect to each proposal.

 

23.   How many votes are needed for the proposals to pass?

Election of Directors (Proposal No. 1). The affirmative vote of a majority of the votes cast at the Annual Meeting in person or by proxy is required for a nominee to be elected. The “affirmative vote of a majority of the votes cast” means that the number of votes cast “FOR” a Director Nominee’s election exceeds the number of votes cast “AGAINST” such Director Nominee’s election. Abstentions and broker non-votes are not counted as votes in this context.

Advisory vote to ratify appointment of Ernst & Young LLP as independent registered public accounting firm (Proposal No. 2) and Advisory vote to approve Named Executive Officer compensation (Proposal No 3). Each of these proposals requires the affirmative vote of a majority of the votes cast at the Annual Meeting in person or by proxy, in order to be approved. In this context, the “affirmative vote of a majority of the votes cast” means that the number of votes cast “FOR” a proposal exceeds the number of votes cast “AGAINST” such proposal. Abstentions and broker non-votes are not counted as votes for either of these proposals. Please note, however, that the results of the votes regarding the appointment of the independent registered public accounting firm (Proposal No. 2) and the approval of Named Executive Officer compensation (Proposal No. 3) are non-binding.

Approval of the 2019 Omnibus Supplemental Incentive Plan (Proposal No. 4). The affirmative vote of a majority of the votes cast at the Annual Meeting in person or by proxy is required for approval of our 2019 Omnibus Supplemental Incentive Plan. The “affirmative vote of a majority of the votes cast” means that the number of votes cast “FOR” the approval of our 2019 Omnibus Supplemental Incentive Plan exceeds the number of votes cast “AGAINST” such proposal. Abstentions and broker non-votes are not counted as votes in this context.

 

24.   What does it mean to “ABSTAIN” from voting and what impact does that have?

If you indicate on your proxy card that you wish to “ABSTAIN” from voting with respect to a particular proposal, your shares will not be voted with respect to that proposal. Your shares, however, will be considered “present” and “entitled to vote” at the meeting and will be counted to determine whether there is a quorum present at the Annual Meeting. Beyond being counted for purposes of establishing a quorum, the practical effect of voting to “ABSTAIN” may vary depending upon the proposal for which you submit it. Voting to “ABSTAIN” will have no effect on the outcome of any of this year’s proposals because the outcome of the vote on each proposal will be based upon the number of votes cast and votes to “ABSTAIN” are not counted as votes cast. However, with respect to Proposal No. 2 (Ratification of the appointment of the independent registered public accounting firm), and Proposal No. 3 (Approval of Named Executive Officer compensation), the vote is advisory in nature and, to the extent that the Board considers and gives weight to the voting results when considering future action on the subject of the proposal, a vote to “ABSTAIN” provides no input to the Board with respect to your preference on that subject.

 

25.   Who will count the votes?

The votes will be counted by an inspector of election appointed by the Board. The Board has appointed Ms. Amy Pavich of Broadridge as the inspector of election and Mr. Peter Scheibelein, also of Broadridge (or such other qualified representative of Broadridge, as necessary), as an alternate inspector of election in the event Ms. Pavich is unable to serve.

 

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26.   What happens if I return my proxy card but do not mark how I want my votes to be cast?

If you timely return a signed and dated proxy card, but do not mark how your shares are to be voted, those shares will be voted by the Proxy Committee as recommended by the Board of Directors.

 

27.   How does the Board of Directors recommend that I vote?

The Board of Directors recommends that you vote your shares:

 

  1.

FOR the election of each of the nominee Directors (Proposal No. 1).

 

  2.

FOR the ratification of the appointment of Ernst & Young LLP as the independent registered public accounting firm for 2019 (Proposal No. 2).

 

  3.

FOR the approval of Named Executive Officer compensation (Proposal No. 3).

 

  4.

FOR the approval of the 2019 Omnibus Supplemental Incentive Plan (Proposal No. 4).

 

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ELECTION OF DIRECTORS

(Proposal No. 1 on the proxy card)

All of our incumbent Directors will stand for election at the Annual Meeting, other than Dr. James A. Thomson. Dr. Thomson has been an invaluable contributor to the Board since joining it in 1996, including serving as Non-Executive Chair of the Board since 2016, Chair of the Nominating & Governance Committee since 2015 and Chair of the Corporate Sustainability Committee (formerly the Public and Environmental Issues Committee) from 2003 to 2015. However, he is not eligible to be re-nominated because of the Board’s mandatory retirement age policy.

If elected, each nominee will serve as a Director for a term expiring on the date of the next succeeding Annual Meeting and until his or her successor is duly elected and qualified. If any nominee is unable to serve, or determines prior to his or her election that he or she will be unable to serve, proxies may be voted by the proxy holders for another person designated by the Board of Directors. We have no reason to believe that any nominee will be unable to serve.

Overview

We are proud to have a Board of Directors comprised of a diverse group of distinguished and highly accomplished individuals, all of whom are independent except for Mr. Newport, our Chief Executive Officer. Collectively, our Directors bring a wide range of viewpoints and backgrounds to the Board, rooted in a broad base of complementary experience and expertise. They share a record of substantial achievements and extraordinary service in the public and private sectors and in charitable endeavors.

The Board’s members include current and former top executives of leading American and international companies. Having overseen successful companies themselves, these Directors are able to assist our Management in reaching and implementing key tactical and strategic decisions, leveraging experiences from their combined decades of leadership and experience. In many instances, the companies with which the Directors are or were formerly executives conduct business in areas that either are related to our ongoing business or operations (such as the steel industry or automotive business), or otherwise share similar characteristics with our business or operations (such as operating in the manufacturing sector).

Many of our Directors also have served and currently serve on other boards of directors, including the boards of some of the world’s top companies, premier academic institutions and leading charitable organizations. Their experiences on these other boards enhance their base of experience and facilitate their ability to provide strategic oversight and direction to our Management.

As with all boards of directors, the composition of our Board changes over time, as new Directors replace those whose service on the Board has ended. Among the numerous responsibilities of the Nominating and Governance Committee, which is comprised entirely of independent Directors, are identifying, screening and recommending persons for nomination by the Board to serve as a Director. Directors are selected on the basis of, among other things, the following criteria listed in our Corporate Governance Guidelines:

 

   

personal qualities and characteristics, such as judgment, integrity, reputation in the business community and record of public service;

 

   

substantive business and professional expertise, experience and accomplishments;

 

   

ability and willingness to devote sufficient time to the affairs of the Board and our Company;

 

   

diversity of viewpoints, backgrounds and experience; and

 

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the needs of the Company and the Board at the time of the Director’s nomination, including the fit of a particular individual’s skills and personality with those of other Directors in building a Board able to provide effective strategic oversight and focus on long-term shareholder value.

One of the explicit criteria listed above for selection as a Director nominee is the diversity of viewpoints, backgrounds and experience the potential nominee will bring to the Board. Thus, the Nominating and Governance Committee specifically considers diversity in discharging its duty to identify, screen and review individuals qualified to serve as Directors. In addition, pursuant to its Charter, the Committee also annually reviews the size and composition of the Board as a whole to consider whether the Board reflects the appropriate balance of skills, experience and other characteristics, including diversity. The Committee does not, however, apply a narrow definition of diversity that would limit it to an individual’s gender, race, ethnic background or other such personal characteristics. Rather, the Committee views diversity as an expansive criterion that encompasses differing backgrounds, perspectives, personal qualities, technical skills, professional experience, expertise, education and other desired qualities. It utilizes this inclusive view in the context of identifying and evaluating nominees whose viewpoints, attributes and experiences, taken as a whole, will complement the existing Board and facilitate its ability to be effective and responsive to our needs and the needs of our stockholders.

The below charts provide, in graphic form, some aspects of the diversity profile of our Board nominees.

 

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Information Concerning Nominees for Directors

 

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Dennis C. Cuneo

 

Director Since: January 21, 2008

 

Age: 69

 

Current Principal Occupation:

Partner, Washington DC office, Fisher & Phillips LLP; President, DC Strategic Advisors, LLC

 

Current AK Steel Board Committees:

•   Corporate Sustainability (Chair)

•   Nominating & Governance

 

Other Public Company Boards:*

Current

•  BorgWarner Inc. (2009 — present)

 

Prior – None

 

Education:

•   Bachelor of Science in Business Administration degree from Gannon College

•   Master of Business Administration degree from Kent State University

•   Juris Doctor degree from Loyola University

 

Prior Significant Positions Held:

  

Served as an attorney at Arent Fox LLP from 2006 to 2010; Senior Vice President of Toyota Motor North America, Inc. from 2000 to 2006; Corporate Secretary and Chief Environmental Officer of Toyota Motor North America, Inc. from 2004 to 2006; and Senior Vice President of Toyota Motor Manufacturing North America from 2001 to 2006.

Other Information:   

Serves on the board of directors for the Center for Automotive Research. Serves as the Vice Chair for the Board of Trustees of Loyola University in New Orleans. Served as Board Chairman of the Cincinnati Branch of the Federal Reserve from 2003 to 2004. Former member of the executive committee and chair of the human resources group of the National Association of Manufacturers. Previous gubernatorial appointments in California, Kentucky and Mississippi.

Narrative Description of

Experience, Qualifications,

Attributes and Skills:

  

Mr. Cuneo brings a wealth of experience in, and a deep understanding of, the automotive industry, our most significant product market and a focus of our corporate strategy, and in government affairs, which has been particularly relevant in the steel industry in recent years. Mr. Cuneo is a former senior executive and officer at Toyota Motor North America, Inc. and Toyota Motor Manufacturing North America. Mr. Cuneo’s Toyota career spanned more than 22 years, during which he was responsible for government relations, environmental affairs, administration, public relations, investor relations, corporate advertising, legal affairs, philanthropy, planning, research, and Toyota’s Latin America Research Group. As one of Toyota’s earliest American manufacturing executives, he was instrumental in the launch of the company’s manufacturing operations in North America, and led Toyota’s site selection team for North America for over ten years. He continues to consult in the automotive industry, and sits on the Boards of BorgWarner Inc., a publicly-traded automotive supplier, and the Center for Automotive Research, a leading auto industry think tank. Thus, he not only brings to the Board his knowledge of the automotive industry and its trends, he also contributes significantly to its expertise and experience in a broad range of Board oversight areas. Mr. Cuneo also is a licensed attorney and has significant experience in trade and government relations, so he is able to provide valuable perspectives on issues facing the Board and our company, particularly with respect to corporate governance, regulatory matters and trade.

 

*

Included in this section for Mr. Cuneo, and similarly for all other nominees below, are all directorships at public companies and registered investment companies held currently or at any time since January 1, 2014.

 

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Sheri H. Edison

 

Director Since: August 1, 2014

 

Age: 62

 

Current Principal Occupation:

Senior Vice President, Chief Legal Officer and Secretary, Bemis Company, Inc.

 

Current AK Steel Board Committees:

•   Management Development & Compensation

•   Nominating & Governance

 

Other Public Company Boards:

•  Current – None

•  Prior – None

 

Education:

•   Bachelor of Arts degree in History and Journalism from the University of Southern California

•   Juris Doctor degree from Northwestern University School of Law

 

Prior Significant Positions Held:

 

Senior Vice President, Chief Administrative Officer and Assistant Secretary of Hill-Rom, Inc. from 2007 to 2010; Vice President, Global Quality System, General Counsel, and Secretary of Hill-Rom, Inc. from 2006 to 2007; Vice President, General Counsel and Secretary of Hill-Rom, Inc. from 2003 to 2007; Vice President and General Counsel and Secretary of Batesville Casket Company, Inc. from 2002 to 2003; Assistant General Counsel of LTV Steel Company from 1999 to 2002.

Other Information:  

Member, National Association of Corporate Directors (NACD) and NACD Fellow; Member of Board of Directors of Fox Valley Community Foundation; Alumnae, DirectWomen Board Institute; Member of Board of Directors of the Waisman Center, University of Wisconsin, Madison.

Narrative Description of

Experience, Qualifications,

Attributes and Skills:

 

Ms. Edison brings valuable knowledge and insight to the Board as a current executive officer of a large, publicly-traded manufacturer, as well as by virtue of her prior steel industry experience. As Senior Vice President, Chief Legal Officer and Secretary of Bemis Company, she is able to share with the Board her experience and acumen dealing with the contemporary, evolving issues present in a complex, multinational manufacturer. In addition, Ms. Edison’s service at Bemis and her prior roles in the legal department of other large manufacturing companies enables her to contribute a broad and deep understanding of the dynamic environment with respect to the legal, regulatory, enterprise risk and corporate governance issues that we regularly face. Ms. Edison also brings direct knowledge and experience from the steel industry, having previously served in a senior management position with LTV Steel Company.

 

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Mark G. Essig

 

Director Since: November 1, 2013

 

Age: 61

 

Current Principal Occupation:

President and Chief Executive Officer, Phoenix Services LLC

 

Current AK Steel Board Committees:

•   Finance (Chair)

•   Audit

 

Other Public Company Boards:

•  Current – None

•  Prior – None

 

Education:

•   Bachelor degree from Loyola University

•   Master of Business Administration degree from the University of Illinois

 

Prior Significant Positions Held:

 

Chief Executive Officer of FKI Security Group from 2012 to 2018. Chief Executive Officer of RathGibson LLC from 2011 to 2012; President and CEO of Sangamon Industries LLC from 2008 to 2011; Chief Executive Officer of Aviation, Power & Marine, Inc. from 2009 to 2010; President and CEO of Barjan LLC from 2002 to 2008; Chief Executive Officer, President and Chairman of the Board of GS Industries from 1998 to 2002; held several positions at AK Steel, including Executive Vice President—Operations and Sales from 1997 to January 1998, Executive Vice President—Sales 1994 to 1997, Vice President—Sales and Marketing from 1992 to 1994 and Assistant to CEO and Vice President—Human Resources in 1992; Chief Financial Officer of Washington Steel Corporation from 1990 to 1992 and Vice President—Finance and Administration from 1988 to 1990.

Other Information:  

Serves on the Board of Directors of Phoenix Services LLC. Served on the Board of Directors of Steel Technologies from 2002 to 2008.

Narrative Description of

Experience, Qualifications,

Attributes and Skills:

 

As a current and former chief executive of several companies, Mr. Essig brings to the Board the perspective of a leader facing a dynamic business environment on a daily basis. As President and CEO of Phoenix Services, a leading international supplier of various services to steel companies around the world, Mr. Essig has an in-depth understanding of the domestic and global steel industry and the key trends shaping the business. He is an accomplished senior operating executive with a wealth of finance, sales and management experience in a number of diverse industries, including significant experience with manufacturing businesses. In addition to his current leadership role at Phoenix Services, he previously served as an executive officer of AK Steel and Washington Steel, and therefore brings to the Board a deep understanding of the industry and its challenges and opportunities. Mr. Essig is one of the Board’s “audit committee financial experts.” Mr. Essig also has experience heading various portfolio companies of private equity firms, where he maintained a keen focus on operational efficiency and maximizing shareholder value.

 

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LOGO

William K. Gerber

 

Director Since: January 1, 2007

 

Age: 65

 

Current Principal Occupation:

Managing Director, Cabrillo Point Capital LLC

 

Current AK Steel Board Committees:

•   Audit (Chair)

•   Finance

 

Other Public Company Boards:

Current

•  Wolverine World Wide, Inc. (2008 — present)

 

Prior

•  Kaydon Corporation (2007 — 2013)

 

Education:

•   Bachelor of Science in Economics degree from the Wharton School at the University of Pennsylvania

•   Master of Business Administration from the Harvard Graduate School of Business Administration

 

Prior Significant Positions Held:

  

Executive Vice President and Chief Financial Officer of Kelly Services, Inc. from 1998 to 2007; Vice President-Finance from 1993 to 1998 and Vice President-Corporate Controller from 1987 to 1993 of L Brands Inc. (f/k/a The Limited Brands Inc.)

Other Information:   

Member, National Association of Corporate Directors (NACD); served on the Board of Directors of Brylane, L.P. from 1993 to 1997.

Narrative Description of

Experience, Qualifications,

Attributes and Skills:

  

Mr. Gerber brings an impressive background in corporate finance and accounting to AK Steel’s Board. Mr. Gerber currently is Managing Director of Cabrillo Point Capital LLC, a private investment fund. Prior to that, he was Executive Vice President and Chief Financial Officer of Kelly Services, Inc., a global staffing solutions company. Prior to joining Kelly Services, Mr. Gerber held senior management positions in corporate finance for The Limited, Inc. By virtue of these and other positions, Mr. Gerber is one of the Board’s “audit committee financial experts.” He thus contributes a broad and keen understanding of complex financial and accounting matters to the Board and its Audit Committee, which he chairs. The Board also benefits from Mr. Gerber’s membership on the audit committee of Wolverine World Wide, Inc., as he is able to share best practices and ideas learned and developed during his service on that committee.

 

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LOGO

Gregory B. Kenny

 

Director Since: January 1, 2016

 

Age: 66

 

Current Principal Occupation:

Retired Chief Executive Officer and President of General Cable Corporation

 

Current AK Steel Board Committees:

•   Finance

•   Corporate Sustainability

 

Other Public Company Boards:

Current

•  Cardinal Health, Inc. (2007 — present); Ingredion Incorporated (2005 — present)

 

Prior

•  General Cable Corporation (1997 — 2015)

 

Education:

•   Bachelor of Science, Business Administration degree from Georgetown University

•   Master of Business Administration degree from The George Washington University

•   Master of Public Administration from Harvard University

 

Prior Significant Positions Held:

  

Chief Executive Officer and President of General Cable Corporation from 2001 to 2015, President and Chief Operating Officer of General Cable from 1999 to 2001, and Executive Vice President and Chief Operating Officer of General Cable from March 1997 to May 1999. Previously held executive level positions at Penn Central Corporation and began his career as a Foreign Service officer with the United States Department of State.

Other Information:   

Served on the Board of Directors of IDEX Corporation from 2002 to 2007; Director of The Federal Reserve Bank of Cleveland, Cincinnati branch, from 2009 to 2014; Former Member of the Board of Governors of the National Electrical Manufacturers Association, Former Member of the Board of Directors of the Cincinnati Museum Center and Former Member of the Board of Big Brothers / Big Sisters of Greater Cincinnati.

Narrative Description of

Experience, Qualifications,

Attributes and Skills:

  

Mr. Kenny is the retired Chief Executive Officer and President of General Cable Corporation, a global manufacturer and distributor of wire and cable products (which itself was publicly-traded prior to being acquired by Prysmian Group in 2018). Having run a large, complex, publicly-traded manufacturing company whose business is similar in many ways to our own, Mr. Kenny provides the Board with a deep and broad understanding of the most significant factors affecting AK Steel’s business. His leadership experience at General Cable also enables him to share unique insights on key trends and emerging issues to help enhance our focus on driving shareholder value. In addition, Mr. Kenny serves as Non-Executive Chair of two other public company boards: Cardinal Health, Inc., a Fortune 20 global healthcare services and products company, and Ingredion Incorporated, a Fortune 500 global ingredients solutions company. Mr. Kenny’s leadership of and experience on the boards of directors of other large, sophisticated international businesses allow him to share best practices on matters including strategic transactions, corporate governance, management succession, executive compensation, risk management and other key areas of Board oversight.

 

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LOGO

Ralph S. Michael, III

 

Director Since: July 20, 2007

 

Age: 64

 

Current Principal Occupation:

Chairman, Fifth Third Bank, Greater Cincinnati Region

 

Current AK Steel Board Committees:

•   Management Development & Compensation (Chair)

•   Finance

 

Other Public Company Boards:

Current

•  Arlington Asset Investment Corporation (2006 — present)

 

Prior

•  Key Energy Services Inc. (2003 — 2016)

 

Education:

•   Bachelor of Arts degree in economics from Stanford University

•   Master of Business Administration degree from the University of California at Los Angeles (UCLA) Graduate School of Management

 

Prior Significant Positions Held:

  

President and Chief Operating Officer of the Ohio Casualty Insurance Company from 2005 until its sale in 2007; Executive Vice President and Manager of West Commercial Banking for U.S. Bank, National Association, and Executive Vice President and Manager of Private Asset Management for U.S. Bank, from 2004 to 2005; President of U.S. Bank Oregon from 2003 to 2005; Executive Vice President and Group Executive of PNC Financial Services Group, with responsibility for PNC Advisors, PNC Capital Markets and PNC Leasing, from 2001 to 2002; Executive Vice President and Chief Executive Officer of PNC Corporate Banking from 1996 to 2001.

Other Information:   

Serves as Vice Chairman for the Cincinnati Center City Development Corporation. Serves on the board of directors of The Cincinnati Bengals, Inc., CSAA Insurance Exchange and AAA Auto Club Alliance. Serves as Vice Chair of the Board of Trustees of Xavier (OH) University. Serves as Vice Chairman of the Board of Trustees of TriHealth, Inc. and on the board of trustees of the Cincinnati Chapter of The American Red Cross.

Narrative Description of

Experience, Qualifications,

Attributes and Skills:

  

Mr. Michael brings a strong business, banking and financial background to the Board. Mr. Michael has held executive level positions with several companies in the insurance and financial sectors, including in his current capacity as Chairman, Fifth Third Bank, Greater Cincinnati Region. Previously, Mr. Michael held various executive and management positions with Fifth Third Bank, Ohio Casualty Insurance Company, U.S. Bank and PNC Financial Services Group. His experience and background also enable him to provide valuable insights on a variety of Board oversight matters, including complex banking and financial issues. In addition, the Board and Management benefit from the experience and knowledge Mr. Michael provides from service on other public company boards. These include capital markets and finance matters as a former director for FBR & Co. and energy-related issues as a former member of the board and former Lead Director of Key Energy Services, Inc.

 

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LOGO

Roger K. Newport

 

Director Since: January 1, 2016

 

Age: 54

 

Current Principal Occupation:

Chief Executive Officer of AK Steel Holding Corporation

 

Current AK Steel Board Committees:

•   None

 

Other Public Company Boards:

•  Current – Alliant Energy (2018 — present)

•  Prior – None

 

Education:

•   Bachelor of Science degree in accounting from the University of Cincinnati

•   Master of Business Administration degree from Xavier University

 

Prior Significant Positions Held:

 

Executive Vice President, Finance and Chief Financial Executive Officer from May 2015 to December 2015; Senior Vice President, Finance and Chief Financial Officer since 2014; Vice President, Finance and Chief Financial Officer since 2012. Prior to that, Mr. Newport served in a variety of other capacities since joining us in 1985, including Vice President—Business Planning and Development, Controller and Chief Accounting Officer, Assistant Treasurer, Investor Relations, Manager—Financial Planning and Analysis, Product Manager, Senior Product Specialist and Senior Auditor.

Other Information:  

Serves as a member of the University of Cincinnati Lindner College of Business Advisory Council, as Chairman of the Board of Directors of the American Iron and Steel Institute, as a member of the Executive Board of the World Steel Association, and as a member of the Steel Market Development Institute CEO Group.

Narrative Description of

Experience, Qualifications,

Attributes and Skills:

 

Mr. Newport is our Chief Executive Officer. He began his career with us in 1985 in the accounting department and quickly advanced through a number of increasingly responsible finance, sales and marketing roles at the corporate headquarters and at Middletown Works. He has broad and deep experience with our business, serving in a variety of officer-level roles. These roles began with Mr. Newport being elected Controller, then progressed to Chief Accounting Officer. Later, Mr. Newport was named Vice President, Business Planning and Development, and Vice President, Finance and Chief Financial Officer. In 2014, he was named Senior Vice President, Finance and Chief Financial Officer, and Executive Vice President, Finance and Chief Financial Officer in 2015. His long and varied tenure with us provides him with comprehensive knowledge of our business and the steel industry generally. In addition, Mr. Newport provides insight into the broader industry as Chairman and member of the Board of Directors of the American Iron and Steel Institute and the World Steel Association, and member of the Steel Market Development Institute CEO Group. As the only Director on the Board who is also a member of Management, he is able to provide the Board with an “insider’s view” of all facets of our business. Mr. Newport constantly engages with employees at multiple levels, and through his communication, experience and leadership skills provides the Board with valuable input and acumen.

 

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LOGO

Dwayne A. Wilson

 

Director Since: January 9, 2017

 

Age: 60

 

Current Principal Occupation:

Retired, Senior Vice President, Fluor Corporation

 

Current AK Steel Board Committees:

•   Nominating & Governance

•   Corporate Sustainability

 

Other Public Company Boards:

•  Current – Ingredion Incorporated (2010 — present)

•  Prior – None

 

Education:

•   Bachelor of Science degree in Civil Engineering from Loyola Marymount University, Los Angeles, CA

 

Prior Significant Positions Held:

 

Senior Vice President of Fluor Corporation from 2014 to 2016; President and Chief Executive Officer of Savannah River Nuclear Solutions, LLC from 2011 to 2014; Group President, Fluor Industrial from 2007 to 2011; President, Fluor Mining & Minerals from 2003 to 2007; President, Fluor Commercial and Industrial Institutional from 2002 to 2003.

Other Information:  

Serves as a trustee of the Fluor Foundation and serves on the Board of Trustees of the Greenville (SC) Health System; serves as a Fellow for the National Association of Corporate Directors; past director of the Urban League of Upstate South Carolina; served as Chairman of the Engineering and Construction Contracting Association from 2002 to 2006.

Narrative Description of

Experience, Qualifications,

Attributes and Skills:

 

Mr. Wilson is a retired Senior Vice President of Fluor Corporation. He gained a wide array of experience with different industries and in varied global geographies during his distinguished 35-year career with Fluor, an international, publicly-traded professional services company providing engineering, construction, commissioning, project management and other services to companies around the world. Much of Mr. Wilson’s experience at Fluor was serving manufacturing and raw materials companies with businesses facing similar issues, risks and opportunities to AK Steel. He also served as President and Chief Executive Officer of Savannah River Nuclear Solutions, LLC, the managing and operating contractor of the U.S. Department of Energy’s Savannah River Site, including the Savannah River National Laboratory. In this position, Mr. Wilson gained multi-faceted experience, including navigating complex government regulations and managing a significant workforce in challenging circumstances. He is also a civil engineer, which enables him to provide the Board and Management with a unique, valuable perspective on operational matters.

 

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LOGO

Vicente Wright

 

Director Since: November 1, 2013

 

Age: 66

 

Current Principal Occupation:

Retired President and Chief Executive Officer of California Steel Industries

 

Current AK Steel Board Committees:

•   Audit

•   Corporate Sustainability

 

Other Public Company Boards:

•  Current – None

•  Prior – None

 

Education:

•   Bachelor degree in marketing from Marquette University

 

Prior Significant Positions Held:

 

President and Chief Executive Officer of California Steel Industries from 2008 to 2012; director of iron ore and pellet sales for VALE SA from 2007 to 2008; President and CEO of Rio Doce America Inc. (RDA) and Rio Doce Limited (RDL), a subsidiary of VALE SA, from 2004 to 2006; President and CEO of California Steel Industries from 2003 to 2004, and Executive Vice President, Finance and CFO from 1998 to 2003.

Other Information:  

Former Chairman and former member of the board of directors for Children’s Fund; former member of the board of directors of American Iron and Steel Institute; former Chairman of California Steel Industries; former board member of Acominas steel mill in Brazil; former board member of CSN steel mill in Brazil; former Chairman and board member of Nova Era Silicon ferro silicon mill in Brazil; and former board member of SEAS ferro manganese mill in France.

Narrative Description of

Experience, Qualifications,

Attributes and Skills:

 

Mr. Wright’s extensive experience in the steel, iron ore and related industries enables him to contribute a wealth of strategic and operational knowledge with respect to key issues affecting us. As a former Chief Executive Officer of another major steel company, he is able to provide valuable insights into the current challenges and opportunities for our business. In addition, by virtue of his experience working for one of the world’s largest iron ore producers, he is able to provide guidance with respect to significant trends and emerging issues pertaining to one of our most significant raw materials. Having served as an executive for several large international metals and mining companies, he brings to the Board a global and diverse perspective to our business. Mr. Wright is one of the Board’s “audit committee financial experts.” Mr. Wright also is multi-lingual and has worked in various regions of the world throughout his distinguished career.

 

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LOGO

Arlene M. Yocum

 

Director Since: January 9, 2017

 

Age: 61

 

Current Principal Occupation:

Retired, Executive Vice President and Managing Executive of Client Service, PNC Asset Management

 

Current AK Steel Board Committees:

•   Audit

•   Management Development & Compensation

 

Other Public Company Boards:

•  Current – None

•  Prior – Key Energy Services, Inc. (2007 — 2016)

 

Education:

•   Bachelor of Arts degree in Economics and Political Science from Dickinson College

•   Juris Doctor degree from Villanova School of Law

 

Prior Significant Positions Held:

 

Executive Vice President and Managing Executive of Client Service, PNC Asset Management from 2003 to 2016; Executive Vice President of the Institutional Investment Group, PNC Asset Management from 1998 to 2003; Director, PNC Private Bank from 1995 to 1998.

Other Information:  

Serves on the board of the Community College of Philadelphia Foundation; served on the board of LaSalle College High School; previously served as trustee of Pierce College and the Philadelphia Bar Foundation; Member, National Association of Corporate Directors (NACD) and Vice Chair of NACD Philadelphia Chapter.

Narrative Description of

Experience, Qualifications,

Attributes and Skills:

 

Ms. Yocum brings extensive business and management experience to the Board, drawing from her distinguished career in the financial services industry and from her prior service on several other public company boards. As a former executive at PNC Bank, including heading the bank’s Client Sales and Service for PNC’s Asset Management Group, she contributes expertise in a variety of investment and finance areas. Ms. Yocum has also served on, and assumed leadership roles with, multiple other public company boards of directors, including chairing audit committees and a special committee overseeing a complex government investigation. Our Board benefits from this deep and varied board and committee experience, as she is able to share best practices and lesson-learned from other companies. Ms. Yocum is one of the Board’s “audit committee financial experts.” In addition, Ms. Yocum has former board experience with an energy services company, through which she acquired and shares with the Board a broad understanding of the energy industry, which is important in light of the fact that energy is and will always be a vital input and significant expense for our business.

 

 

 

 

LOGO

 

  

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE FOREGOING NOMINEES.

 

 

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CORPORATE GOVERNANCE

Committees of the Board of Directors

The Board of Directors has five standing committees: an Audit Committee, a Corporate Sustainability Committee, a Finance Committee, a Management Development and Compensation Committee, and a Nominating and Governance Committee. The table below shows the current membership for each Board committee.

 

    Director

   Audit
Committee
  Corporate
Sustainability
Committee
  Finance
Committee
  Management
Development and
Compensation
Committee
  Nominating and
Governance
Committee

  Dennis C. Cuneo

     (Chair)      

  Sheri H. Edison

          

  Mark G. Essig

       (Chair)    

  William K. Gerber

   (Chair)        

  Gregory B. Kenny

          

  Ralph S. Michael, III

         (Chair)  

  Roger K. Newport

          

  Dr. James A. Thomson (1)

           (Chair)

  Dwayne A. Wilson

          

  Vicente Wright

          

  Arlene M. Yocum

          

 

  (1)

Dr. Thomson is the independent Non-Executive Chair of the Board. He will retire from the Board and, therefore, no longer be a member of these Committees, following the 2019 Annual Meeting. As previously disclosed, he is not eligible to be re-nominated because of the Board’s mandatory retirement age policy.

Audit Committee

The Audit Committee currently has four members and met nine times in 2018. The primary purpose of the Audit Committee is to assist the Board of Directors in fulfilling its responsibility to oversee Management’s conduct of our financial reporting process, including:

 

   

overseeing the integrity of our financial statements and internal control over financial reporting;

 

   

monitoring compliance with legal and regulatory requirements;

 

   

assessing the independent registered public accounting firm’s qualifications and independence;

 

   

assessing the performance of the independent registered public accounting firm and internal audit function;

 

   

determining annually that one or more of its members meets the definition of “audit committee financial expert” within the meaning of the Sarbanes-Oxley Act of 2002; and,

 

   

reviewing annually the financial literacy of each of its members, as required by the New York Stock Exchange (“NYSE”) listing standards.

The Audit Committee also has principal oversight over cybersecurity and information technology matters and regularly discusses these subjects in detail, including assessments of the key risks we face and Management’s actions to mitigate or eliminate these risks.

 

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In fulfilling these responsibilities, the Audit Committee selects and appoints the independent registered public accounting firm that will serve as the independent auditor of our annual financial statements and internal control over financial reporting. As a matter of good corporate governance, the Committee seeks non-binding ratification by our stockholders of the appointment of that firm as our independent registered public accounting firm. The Committee also meets with representatives of that accounting firm to review the plan, scope and results of the annual audit, our critical accounting policies and estimates, and the recommendations of the independent registered public accounting firm regarding our internal accounting systems and controls. The report of the Audit Committee is located on page 101.

At its March 2019 meeting, the Board of Directors determined that all of the members of the Audit Committee are financially literate and that Ms. Yocum and each of Messrs. Essig, Gerber and Wright is an “audit committee financial expert,” as that term is defined in Item 407(d)(5) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Board further determined that each member of the Audit Committee satisfies the independence requirements of the NYSE Listed Company Manual Sections 303A.02, 303A.06 and 303A.07 and Rule 10A-3 of the Exchange Act. The Audit Committee and each of its members also satisfy all other applicable requirements of those provisions.

Corporate Sustainability Committee

The Corporate Sustainability Committee currently has four members and met five times in 2018. The primary purpose of the Corporate Sustainability Committee is to review on behalf of the Board, and to advise Management with respect to:

 

   

the responsibilities of good corporate citizenship with respect to sustainability, public policy, trade, environmental matters, legal, health and safety issues;

 

   

environmental policies, procedures and performance;

 

   

health and safety policies, procedures and performance;

 

   

major litigation and other significant legal matters, including policies and procedures for complying with legal and regulatory obligations;

 

   

the activities of the AK Steel Foundation and policies and procedures for charitable contributions;

 

   

the activities of the AK Steel Political Action Committee (“PAC”) and policies and procedures for political contributions;

 

   

the national and international developments in political, legislative, regulatory and other matters involving public policy that may impact our business, including trade matters;

 

   

policies and procedures relating to our corporate sustainability and social responsibility activities, including without limitation those pertaining to:

 

   

energy consumption;

 

   

water usage;

 

   

climate change;

 

   

greenhouse gases and other emissions;

 

   

waste disposal;

 

   

recycling; and

 

   

social matters.

 

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Among other activities, the Corporate Sustainability Committee also (i) evaluates and provides direction with respect to our annual Sustainability Report, (ii) oversees our activities concerning trade matters and government relations, including the operations of the AK Steel PAC and the contributions that it has made, and (iii) monitors our progress on our GHG emissions reduction targets and initiatives.

Finance Committee

The Finance Committee currently has four members and met seven times in 2018. The primary purpose of the Finance Committee is to advise and assist the Board in fulfilling its oversight responsibilities with respect to:

 

   

reviewing and recommending to the Board our annual Business Plan;

 

   

our exposure to short- and long-term financial risk and Management’s strategies, plans and procedures to manage such risks, including its hedging strategies;

 

   

our capital structure and liquidity, including credit facilities;

 

   

Management’s assessment of our cash needs, evaluation of capital market and other options to assist in addressing those needs, and recommendations with respect to those options; and,

 

   

the performance of the members of the Benefit Plans Administrative Committee and the Benefit Plans Asset Review Committee, and the performance of assets under the direction of the Benefit Plans Asset Review Committee.

Management Development and Compensation Committee

The Management Development and Compensation Committee currently has four members and met five times in 2018. The primary purpose of the Management Development and Compensation Committee is to assist the Board in overseeing our management compensation policies and practices, including:

 

   

designing and evaluating our compensation program to ensure that it is structured to facilitate our foundational principle of pay-for-performance;

 

   

overseeing and reporting to the Board on the development and implementation of our policies and programs for the development of our senior leadership, including our Executive Officer succession plan;

 

   

determining and approving the compensation of our Chief Executive Officer and other Executive Officers;

 

   

reviewing and approving management incentive compensation policies and programs, including equity compensation for employees;

 

   

reviewing and approving the CD&A for inclusion in the proxy statement;

 

   

reviewing and assessing our compensation program to determine whether any of its aspects encourage excessive or inappropriate risk-taking;

 

   

reviewing and assessing any stockholder advisory vote on the compensation of our Named Executive Officers (“say-on-pay vote”) and feedback from Management’s stockholder engagement program, including consideration of whether to make any adjustments to our executive compensation policies and practices in light of such assessments;

 

   

reviewing and recommending to the Board the frequency with which we should submit to the stockholders a say-on-pay vote; and,

 

   

reviewing the independence of its compensation consultant(s).

 

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In addition, to ensure that Management and the Board are adequately focused on diversity and inclusion, every meeting of the Committee includes at least one agenda item related to these topics and our ongoing initiatives to improve on these fronts at each level of our company, from the Executive Officers to the plant floor.

At its March 2019 meeting, the Board of Directors determined that all of the members of the Management Development and Compensation Committee are “non-employee directors” as that term is defined in Rule 16b-3(b)(3) under the Exchange Act. The Board further determined that each member of the Management Development and Compensation Committee satisfies the independence requirements of NYSE Listed Company Manual Section 303A.02. The Management Development and Compensation Committee and each of its members also satisfy all of the requirements of NYSE Rule 303A.05. For additional information concerning the Management Development and Compensation Committee and its activities, see “Compensation Discussion and Analysis” beginning on page 41. The Board also determined that all of the current members of the Committee are “outside directors” as that term is defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). Although the 2017 Tax Cuts and Jobs Act (“2017 Tax Reform”) repealed the exception to Section 162(m) regarding deductibility for performance-based compensation for tax years beginning after December 31, 2017, certain transition and grandfathering rules exist for which compliance with Section 162(m) rules may continue to be advantageous, so the Board has continued to determine which members of the Board qualify as an “outside director” under the associated rules and regulations.

Nominating and Governance Committee

The Nominating and Governance Committee currently has four members and met five times in 2018. The primary purpose of the Nominating and Governance Committee is to assist the Board in:

 

   

reviewing the size and composition of the Board as a whole, including whether the Board reflects the appropriate balance of independence, sound judgment, business specialization, technical skills, diversity (including gender, ethnic and racial diversity) and other desired qualities;

 

   

identifying, screening and reviewing individuals qualified to serve as Directors and recommending to the Board candidates for nomination for election at the Annual Meeting of Stockholders or to fill Board vacancies;

 

   

overseeing our policies and procedures for the receipt of stockholder suggestions regarding Board composition and recommendations of candidates for nomination by the Board;

 

   

developing, recommending to the Board and overseeing implementation of our Corporate Governance Guidelines;

 

   

reviewing on a regular basis our overall corporate governance policies and recommending improvements when necessary or appropriate;

 

   

considering the independence and related qualifying determinations of each Director and nominee for Director and making a recommendation to the Board with respect to such matters; and,

 

   

reviewing our policies and procedures for the review, approval or ratification of reportable transactions with related persons, including reviewing and addressing conflicts of interest of Directors and Executive Officers, and making a recommendation to the Board with respect to such matters.

At its March 2019 meeting, the Board of Directors determined that all of the members of the Nominating and Governance Committee satisfy the independence requirements of NYSE Listed Company Manual Sections 303A.02 and 303A.04. The Nominating and Governance Committee and each of its members also satisfy all other requirements of those provisions.

 

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In fulfilling its responsibility of identifying, screening and recommending persons for nomination by the Board to serve as a Director, the Committee may solicit input and/or recommendations from other members of the Board and/or independent advisors. After the Committee deliberates, it reports its findings and recommendations to the Board. The Board then considers that recommendation and proposes a slate of nominees to the stockholders for election to the Board. In addition to meeting independence requirements, nominees for the Board must not have reached their 74th birthday at the time of their election. The principal criteria used for the selection of nominees, as well as the focus of the Committee on diversity as part of the selection process, is described more fully above at page 7 under “Overview.”

The Nominating and Governance Committee will give appropriate consideration to candidates for Board membership nominated by stockholders in accordance with our By-laws, or as otherwise recommended, and will evaluate such candidates in the same manner as other candidates identified to the Committee. Any such recommendations may be submitted in writing to the Chair of the Nominating and Governance Committee, c/o Corporate Secretary, AK Steel Holding Corporation, 9227 Centre Pointe Drive, West Chester, Ohio 45069, and should contain all required information and any other supporting material the stockholder considers appropriate. The Committee also will consider whether to nominate any person nominated by a stockholder pursuant to the provisions of our By-laws relating to stockholder nominations as described below at page 116 in “Stockholder Proposals for the 2020 Annual Meeting and Nominations of Directors.” No such nominee was recommended by any stockholder or stockholder group for election at the 2019 Annual Meeting. As part of the Committee’s ongoing review of corporate governance best practices, the Board has adopted proxy access by-law provisions pursuant to the Committee’s recommendation.

Board and Committee Self-Evaluation Process

We conduct thorough, regular Board and Committee self-evaluations, with the principal goals being to further improve the effectiveness and efficiency of the Board, to discuss Board composition (including whether the current composition collectively has the experience, expertise, diversity and skills necessary to meet the needs of the Board and our business), to openly and proactively address any potential future issues, and to foster honest and candid dialogue among our Directors in order to ensure that the Board is able to discharge its duties as successfully as possible. Our Board evaluation process includes multiple-faceted assessments that are scheduled and performed throughout the year at the Board and Committee levels. These evaluations include a combination of written feedback and verbal discussions, as the Board believes that providing various means of communication and feedback will encourage more and broader discourse.

In 2018, the Board engaged an independent third party to help facilitate its self-evaluation process. The third-party facilitator, a corporate attorney who has significant experience with public and private boards of directors, governance and other relevant matters, worked closely with the Non-Executive Chair to tailor a multi-step self-evaluation process. This process included a questionnaire developed by the facilitator and the Non-Executive Chair intended to solicit feedback on a wide variety of Board and Committee subjects. These questionnaires were completed by each Director and by certain members of Executive Management who work closely with the Board. After reviewing the completed questionnaires, the third-party facilitator conducted interviews with each Director to discuss their responses and any other input relevant to the Board self-evaluation. The third party then reported the results of the questionnaires and interviews directly to the Non-Executive Chair, including detailed comments and suggestions from Directors as appropriate. At the Board’s May 2018 meeting, the third party facilitator and Non-Executive Chair summarized the highlights and key takeaways from the self-evaluation process. The Board engaged in an extended discussion with respect to the items reported, both with the third-party facilitator and in a private executive session.                

 

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Among other direct outcomes of the Board’s 2018 self-evaluation process, the Directors determined to seek alternatives to further bolster the depth into which the Board and its Committee could discuss and delve into the important strategic matters addressed at its meetings. After considering a number of alternatives, the Board elected to change the composition of its Committees and lengthen their meetings, in addition to modifying certain aspects of the Board meeting agendas and schedules. The Board believes that these changes, which were driven by its self-evaluation process, will continue to improve its effectiveness and efficiency. The Nominating and Governance Committee, with the concurrence of the Board, currently intends to utilize an independent third-party facilitator periodically, though not every year, in order to keep its self-evaluation process fresh, dynamic and effective.

In addition to the formal Board and Committee self-evaluation processes addressed above, our Non-Executive Chair regularly speaks with the members of our Board between meetings to solicit feedback and guidance as to the functioning of the Board in general and with respect to specific subjects.

Majority Voting

Section 7(a) of our By-laws provides that each Director in an uncontested election shall be elected by the vote of the majority of votes cast at any meeting for the election of Directors. The By-laws also include a Director resignation procedure consistent with the majority vote standard requiring an incumbent Director who does not receive the requisite affirmative majority of the votes cast for the Director’s re-election to tender his or her resignation to the Board within 30 days. The Board, after considering the recommendation of the Nominating and Governance Committee on the matter, will publicly disclose, within 90 days after the certification of election results, its decision as to whether to accept the tendered resignation.

Director nominees in contested elections will continue to be elected by the vote of a plurality of the votes cast.

Attendance at Meetings

The Board of Directors met eight times in 2018. We expect each Director to make a diligent effort to attend all Board meetings and meetings of those committees of which he or she is a member. During 2018, all Directors attended at least 85% of the aggregate of the total meetings of the Board and those committees of which he or she was a member. We do not have a formal written policy regarding Director attendance at the Annual Meeting, although Directors are encouraged to attend. All Directors in office at that time attended the 2018 Annual Meeting.

Director Stock Ownership Guidelines

Under the stock ownership guidelines for non-employee Directors, each such Director is expected to hold at least 25% of the shares of our common stock issued to that Director pursuant to a restricted stock unit award until at least six months following the Director’s termination of service on the Board. All of the Directors currently are in compliance with the stock ownership guidelines.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our Directors and officers, and persons who own beneficially more than ten percent of a registered class of our equity securities, to file with the Securities and Exchange Commission initial reports of their ownership of such equity securities and to report any changes in that ownership. Exchange Act Rule 16a-3(e) requires officers, Directors and greater-than-ten-percent beneficial owners to furnish us with copies of all reports that they file pursuant to Section 16(a).

 

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To our knowledge, based upon a review of the copies of the reports furnished to us and written representations from our Executive Officers and Directors that no other reports were required, we complied with all applicable Section 16(a) filing requirements during 2018.

Board Leadership Structure

Our Board has been led by an independent, Non-Executive Chair since 2016. Dr. Thomson has served in that role since that time, and we have benefitted greatly from his extensive leadership experience and his years of experience on our Board. Subject to our mandatory retirement policy for Directors, after 22 years of outstanding service, Dr. Thomson will be retiring as Non-Executive Chair following the 2019 Annual Meeting of Stockholders. In order to ensure a smooth transition of the Board’s leadership upon Dr. Thomson’s mandatory retirement, in early 2018 the Nominating and Governance Committee began working on a Board leadership succession plan. Since that time, the Committee has regularly updated and solicited input from the full Board and from members of the Board individually. As part of its Board leadership succession planning efforts, the Nominating and Governance Committee evaluated (i) whether to combine the roles of the Chief Executive Officer and Chair of the Board, (ii) which Directors would be best situated to serve the Board as Non-Executive Chair (or Lead Director, as the case may be), and (iii) and the implications of these determinations on the functioning and effectiveness of the Board in discharging its duty to maximize long-term shareholder value.                

Ultimately, the Board determined to maintain an independent Non-Executive Chair and that Dr. Thomson should be succeeded in that role by Mr. Ralph S. “Mike” Michael. Mr. Michael has been a member of the Board for over eleven years and has served in multiple leadership positions, including as the current Chair of the Management Development and Compensation Committee and previously as Chair of the Finance Committee. During Mr. Michael’s service on our Board, he has gained a deep understanding of our business and the steel industry, while also maintaining his independence from Management. We believe this Board leadership structure provides the optimal situation for Mr. Newport to focus principally on his day-to-day role as our Chief Executive Officer, while also serving as a member of the Board. The Board believes that separating the Chief Executive Officer and Chair roles continues to be the best and most efficient leadership structure for us at the present time. The Board reviews the issue of Board leadership structure on at least an annual basis and may re-assess the appropriateness of this structure at any time.

In determining that we and our stockholders are best served with Dr. Thomson (and, following his retirement, Mr. Michael) as Non-Executive Chair and leading the Board as it oversees our strategic direction, business and other significant affairs, the Board considered a number of factors. Chief among the factors were the following:

 

   

the Board’s ongoing belief that Mr. Newport’s near-term focus as CEO should be his oversight responsibilities as our top Executive Officer in managing AK Steel’s daily business affairs. As a member of the Board, Mr. Newport also has the opportunity to share his perspectives directly with the Board and contributes to our strategic direction;

 

   

the Board’s view that, under the current circumstances, a governance structure separating the CEO and Chair roles promotes balance between (i) the Chair’s role in leading the Board’s oversight of Management and supporting its ability to carry out its roles and responsibilities on behalf of our stockholders, including overall corporate governance, and (ii) the CEO’s management of our business and strategy on a day-to-day basis; and,

 

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the benefits the Board has derived from Dr. Thomson (and, following his retirement, expects to receive from Mr. Michael) serving as Non-Executive Chair, including:

 

  (i)

his leadership experience, as a former Executive Officer himself, as well as with our Board, having served as the Chair of multiple committees and working closely with the other Directors during his tenure;

 

  (ii)

his steadfast independence, which enables him to serve as a valuable liaison between the Board and senior Management, while also empowering independent Directors to raise issues and concerns for Board consideration without immediately involving Management; and

 

  (iii)

his extensive understanding of our business specifically, and the steel industry generally, as a result of his service on our Board.

In making the determination concerning the Board’s leadership structure, the Board also considered the impact of the structure on its risk oversight role. The Board concluded that its role on risk oversight is fully consistent with, and supported by, the current leadership structure that includes a separate Non-Executive Chair and CEO. In addition, there are policies and practices in place to ensure effective and independent Board oversight of Management, including: (1) all members of the Board, other than Mr. Newport, are independent Directors; (2) each of the Board’s Committees is chaired by and comprised entirely of independent Directors; (3) the Board, upon the recommendation of its Management Development and Compensation Committee, annually establishes goals and objectives for Mr. Newport and reviews his performance; (4) the Management Development and Compensation Committee annually determines Mr. Newport’s compensation package; and (5) the Directors meet in “Executive Session” with non-employee Directors only at least once during each regularly scheduled Board meeting and also during most of the meetings of its Committees.

 

 

  Board Leadership Structure

 

•  Independent Non-Executive Chair of the Board Through 2019 Annual
Meeting—Dr. James A. Thomson

•  Independent Non-Executive Chair of the Board Following 2019 Annual
Meeting—Mr. Mike Michael

•  All Committees of the Board are chaired by independent Directors

•  Active engagement by all Directors, as well as regular “Executive Sessions”
with independent Directors only

•  Sole member of Management on the Board is Mr. Newport, our Chief Executive Officer

 

Communication with the Board of Directors

Stockholders and interested parties may send communications to the Non-Executive Chair of the Board, or to any one or more of the other Directors by addressing such correspondence to the name(s) of any specific Director(s), or to the “Board of Directors” as a whole, and mailing it to: Corporate Secretary, c/o AK Steel Holding Corporation, 9227 Centre Pointe Drive, West Chester, Ohio 45069.

Board Independence

In accordance with the requirements of the NYSE, the Board maintains a policy requiring that at least a majority of its members shall be “independent,” as determined under applicable law and regulations, including without limitation Section 303A of the NYSE Listed Company Manual. Our Corporate Governance Guidelines include categorical standards for determining the independence of all non-employee Directors. Those standards are set forth in guidelines attached as Exhibit A to our Corporate Governance Guidelines, which are available on our website at www.aksteel.com. A Director

 

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who meets all of the categorical standards set forth in the Corporate Governance Guidelines shall be presumed to satisfy the NYSE’s definition of “independence” and thus be “independent” within the purview of the Board’s policy on Director independence.

At its March 2019 meeting, the Board of Directors reviewed the independence of all current non-employee Directors. In advance of that meeting, each incumbent Director was asked to provide the Board with detailed information regarding his or her business and other relationships with us and our affiliates, and with Executive Officers and their affiliates, to enable the Board to evaluate his or her independence.

Upon the recommendation of the Audit Committee regarding audit committee independence, the Management Development and Compensation Committee as to compensation committee independence, and the Nominating and Governance Committee with respect to all other aspects of Board independence, and after considering all relevant facts and circumstances with the assistance of legal counsel, the Board affirmatively determined that none of the current incumbent Directors, except for Mr. Newport, has a material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us), other than being a Director, and all such incumbent Directors other than Mr. Newport meet the categorical standards of independence set forth in our Corporate Governance Guidelines and therefore are “independent” as that term is used and defined in Section 303A of the NYSE Listed Company Manual and in Rule 10A-3 under the Exchange Act. The Board further determined that each of the incumbent Directors other than Mr. Newport is a “Non-Employee Director,” as defined in Rule 16b-3(b)(3) promulgated under the Exchange Act, and that nine of our eleven incumbent Directors (Messrs. Cuneo, Gerber, Kenny, Michael, Thomson, Wilson and Wright, and Mmes. Edison and Yocum) are an “outside director” as that term is used in Section 162(m) of the Internal Revenue Code and the associated Treasury Regulations, 26 CFR § 1.162-27 et seq. As mentioned above, while the 2017 Tax Reform repealed the exception to Section 162(m) regarding deductibility for performance-based compensation, certain transition and grandfathering rules exist for which compliance with Section 162(m) rules may continue to be advantageous, so the Board has continued to determine which members of the Board qualify as an “outside director” under the associated rules and regulations.

Under our Corporate Governance Guidelines, Directors have an affirmative ongoing obligation to inform the Board of any material changes that might impact the foregoing determinations by the Board and, under certain circumstances, to tender their resignation for consideration. This obligation includes all business relationships between the Director and/or an immediate family member, on the one hand, and us and/or our affiliates and/or Executive Officers, on the other.

Board Oversight of Risk

As an integral part of its oversight function, the Board oversees the material risks facing us, both with respect to the relative probability and magnitude of the risks and also as to Management’s strategies to mitigate those risks. The Board engages in its risk oversight role in a variety of different ways.

The Board as a whole typically discusses and addresses the key strategic risks facing us. Specific strategic risks facing us are addressed at Board and Committee meetings, whether they relate to our overall strategy, particular projects or subjects, or other topics being considered by the Board as a separate agenda topic. In addition, at least once annually, the Board has a multi-day meeting devoted exclusively to strategic planning, including identifying and addressing our principal strategic risks and potential opportunities.

In addition, the Board delegates responsibility for oversight of specific risk categories to its Committees. Generally, each Committee has responsibility to identify and address risks which are

 

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associated with the purpose of, and responsibilities delegated to, that Committee. For example, the Audit Committee oversees risks related to financial reporting, internal controls, accounting and cybersecurity matters; the Corporate Sustainability Committee handles risks related to health and safety issues, public policy, international trade, environmental, climate change and sustainability matters, and issues related to our reputation; the Finance Committee oversees our exposure to short- and long-term financial risk, including risks relating to our capital structure, liquidity, hedging strategies, pension and benefit plans, pension fund asset performance and cash needs; the Management Development and Compensation Committee deals with risks related to Management compensation, senior Management development and succession planning, and employment benefits and policies; and the Nominating and Governance Committee manages risks related to Board composition and succession planning, Director independence, governance, and corporate compliance and reporting obligations. Each Committee Chair reports to the full Board on any significant risks that the Committee has discussed. Depending upon the nature and severity of the risk, the Committee may simply report to the Board on that risk or it may make recommendations to the Board, which then are discussed and acted upon by the Board as a whole. For those risks that cross several disciplines or that could have impacts across various stakeholder groups, multiple Committees may review the relevant aspects of the risk in the Committee setting prior to a discussion at the full Board session.

The Board’s oversight of risk is enhanced by the detailed information it receives as a result of our Total Enterprise Risk Management (“TERM”) program. We use the TERM program as a tool for identifying our key risks and discussing them with the Board in a prompt, logical and efficient manner. The TERM assessment is performed quarterly and involves evaluation of the key risks that we currently face or are likely to encounter in the near, medium and long term. During the quarterly TERM assessment, each manager responsible for a significant area of our business will review and, to the extent necessary, update or supplement a list of key risks affecting his or her respective business area. As part of that process, the manager evaluates each risk according to its likelihood of occurrence in the succeeding twelve months and, assuming that the development or event at risk was to occur, its most likely impact on our financial condition, operations, industry or reputation. The most significant risk items identified in each quarterly report are discussed with the Audit Committee. In addition, a complete copy of the annual TERM report is distributed to and discussed by the full Board, typically in the Board’s regularly scheduled January meeting.

With respect to cybersecurity risk, the Audit Committee has principal oversight and regularly reviews information technology risks and the processes and safeguards we maintain and continually assess to protect sensitive business and commercial information and employees’ and other individuals’ data. Our senior managers who are directly responsible for cybersecurity regularly present to the Audit Committee and the full Board in order to ensure a candid and fulsome discussion of the relevant risks and the aspects of our security program designed to prevent and mitigate those risks. Moreover, at one meeting each year, the Audit Committee and Board engage in a broader and deeper evaluation and discussion of the IT and cybersecurity risks that we face and the initiatives we are undertaking undertaken to eliminate or mitigate them, as applicable. In addition, cybersecurity risks are addressed in our detailed TERM report that is discussed with and reviewed by the Board.

The Board’s consideration of risk is not limited to discussions during Board and Committee meetings. Rather, the Board communicates with senior Management as a group, or individually, concerning our most significant risks whenever it deems such communications to be appropriate. In addition, each Director has complete access to all of our employees to the extent he or she may have questions concerning a particular risk.

 

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Risk Assessment with Respect to Compensation Policies and Practices

At its January 2019 meeting, the Management Development and Compensation Committee (for purposes of this section, the “Committee”) reviewed the various design elements of our compensation program to determine whether any of its aspects encourage excessive or inappropriate risk-taking. The scope of this review included aspects of executive compensation, as well as consideration of the items of our compensation policies and practices that affect all employees. The Committee’s independent compensation consultant, Frederick W. Cook & Co., also assisted the Committee with this assessment. In general, the process used by the Committee to complete its risk evaluation was as follows:

 

   

the Committee identified the most significant risks facing us;

 

   

the Committee identified the material design elements of our compensation policies and practices with respect to all employees; and

 

   

the Committee then evaluated whether there is a relationship between any of those design elements and any of our most significant risks, specifically considering whether any of the design elements of our compensation policies and practices encourage our employees to take excessive or inappropriate risks that are reasonably likely to have a material adverse impact on us.

The result of the Committee’s evaluation was a conclusion that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on us. More specifically, the Committee concluded that our compensation program is designed to encourage employees to take actions and pursue strategies that support the best interests of our stockholders over the long run, without promoting excessive or inappropriate risk.

The design elements of our program (which are described in detail in the CD&A section beginning at page 45) do not include unusual or problematic compensatory components that have been linked to excessive risk-taking in the financial and other industries. Furthermore, the design elements of our compensation program that directly tie compensatory rewards to our performance include various counter-balances designed to offset potentially excessive or inappropriate risk-taking. For example, there is a balance between the fixed components of the program and the performance-based components. Similarly, the performance-based components are balanced between annual and longer-term incentives. Thus, the overall program is not too heavily weighted towards incentive compensation, in general, or short-term incentive compensation, in particular. The financial incentives are not based upon revenue. Rather, they are tied to performance metrics such as net income, EBITDA (i.e., earnings before interest, taxes, depreciation and amortization), and total shareholder return, which more closely align the interests of Management with the interests of our stockholders. The performance metrics for incentive payments are established annually (either for the then-current year or for a three-year performance period beginning with the then-current year) and reflect goals that are difficult, but not so challenging that they require performance outside of what the Committee believes is reasonable for us or could motivate Management to take actions in which we assume unreasonable levels of risk. In addition, there are caps on how much performance-based compensation may be earned in a particular performance period and the Board of Directors has adopted a policy for clawback of performance-based compensation that was paid out as a result of fraudulent or illegal conduct on the part of the employee who received it. The Committee also maintains an ongoing dialogue with our Management to track progress on performance-based goals in order to foresee and avoid any excessive or inappropriate risk-taking that may otherwise be driven by a desire to maximize performance-based compensation.

 

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Related Person Transactions

All related person transactions, as defined by Item 404(a) of Regulation S-K under the Exchange Act, must be reviewed and approved or ratified by the Board (or a committee of the Board to which such responsibility is delegated by the Board) for the purpose of determining whether such transactions are in, or not inconsistent with, our best interests and the interests of our stockholders. The process by which we determine whether any related person transactions exist is summarized below. For 2018, we had no related person transactions.

Based on information submitted to us by Directors and Executive Officers on a quarterly and annual basis (and by Director nominees prior to their election or appointment), we develop a list of related persons, which we distribute to individuals internally who have, or who might reasonably be expected to have, responsibility for a transaction or proposed transaction between us and a related person. Directors, Director nominees and Executive Officers are expected to timely update the information they submit to us in the event of relevant changes or developments.

The recipients of the list must provide prior notice to our General Counsel of any plans or intentions for anyone within their respective business units, departments or areas of responsibility to enter into any agreement by or on our behalf with a related person. If the General Counsel determines that the proposed transaction is a related person transaction, the transaction will be submitted to the Nominating and Governance Committee for its consideration and approval at its next meeting.

The Nominating and Governance Committee considers all available and relevant facts and circumstances in determining whether to approve a related person transaction submitted for its review, including, if applicable:

 

   

the benefits of the transaction to us;

 

   

the impact on a Director’s independence in the event the related person is a Director, an immediate family member of a Director, or an entity in which a Director is a partner, stockholder or Executive Officer;

 

   

the availability of other sources for comparable products or services;

 

   

the specific terms of the transaction; and

 

   

the terms available to unrelated third parties or to employees generally for a comparable transaction.

The Nominating and Governance Committee approves only those related person transactions that it determines are in, or are not inconsistent with, our best interests and the interests of our stockholders.

In the event that we enter into a legally binding related person transaction before approval by the Nominating and Governance Committee, then the Nominating and Governance Committee will review the transaction at its next meeting unless it is subject to an exemption. The Nominating and Governance Committee will determine whether to ratify a related person transaction by applying the same procedures and standards that it would have used to determine whether to approve a related person transaction in advance. In the event that the Nominating and Governance Committee determines that it would not be appropriate to ratify the transaction, the Nominating and Governance Committee will identify the options available to us, including but not limited to rescission, amendment or termination of the related person transaction.

Documents Available on Our Website

The charters of the Audit, Corporate Sustainability, Finance, Management Development and Compensation, and Nominating and Governance Committees, as well as our Corporate Governance Guidelines, Code of Business Conduct and Ethics for AK Steel Directors, Officers and Employees, and Code of Ethics for Principal Officers of AK Steel, are posted on our website at www.aksteel.com.

 

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DIRECTOR COMPENSATION

The Nominating and Governance Committee has oversight of Director compensation and evaluates its program no less than annually, conducting a detailed assessment at its regularly scheduled meeting each July. As part of this assessment, the Board engages in a comprehensive review of, among other things, the structure of the program and whether it addresses the principal goals of Board engagement, retention and alignment with stockholders and the company generally, the quantum and mix of components (i.e., cash and equity) of the compensation package, and whether the compensation of Directors is consistent with best practices and prevailing trends, including compared to our peer group (the same peer group of companies that is utilized and regularly reviewed by the Management Development and Compensation Committee for executive compensation purposes) and market practice generally for similarly situated companies. The Nominating and Governance Committee also utilizes an independent compensation consultant, Frederic W. Cook & Co., to assist with this evaluation. Among other factors evaluated during the Committee’s assessment in 2018 were that its total per Director compensation was near the bottom quartile of the total per Director compensation for the boards of directors of its peer group companies. In addition, the Committee determined that Dr. Thomson’s incremental retainer for service as Non-Executive Chair was less than the 25th percentile relative to the incremental retainer for the same position at companies in our peer group. As a result of the Nominating and Governance Committee’s 2018 assessment, on July 19, 2018, the Committee recommended, and the Board of Directors approved, the following changes to the compensation program for non-employee Directors, effective August 1, 2018: (i) a $5,000 increase to the cash component of the annual Board retainer fee, from $100,000 to $105,000; (ii) a $5,000 increase in the restricted stock unit (“RSUs”) component of the annual Board retainer fee, from $115,000 to $120,000; and (iii) approved a $15,000 increase to the retainer fee for the Non-Executive Chair of the Board, from $60,000 to $75,000. Thus, effective August 1, 2018, each non-employee Director receives an annual Board retainer fee for service on the Board in the amount of $225,000, of which $120,000 is paid in the form of RSUs and $105,000 is paid in the form of cash or, at the Director’s option, in the form of additional RSUs. Non-employee Directors no longer receive per meeting fees, other than when the Board determines that such fees are warranted in light of a significant number of additional required meetings in extraordinary cases (e.g., a special committee). Each member of the Audit Committee receives an incremental $7,500 cash retainer in recognition of that Committee’s additional number of regularly scheduled meetings and the resultant increased workload relative to the Board’s other Committees.

In 2016, the Management Development and Compensation Committee recommended, and the Board approved, an Amended and Restated Stock Incentive Plan (“Amended Stock Plan”), which was subsequently approved by our stockholders at the 2016 Annual Stockholder Meeting. Among other changes, the Amended Stock Plan, as approved by our stockholders, provides that no Director may receive more than $750,000 in total annual compensation, in any form. The 2019 Omnibus Supplement Incentive Plan, which we have put forth for stockholder approval in Proposal No. 4 of this Proxy Statement, includes this same limit on Director compensation. As set forth in the Director Compensation Table below, the highest paid Director in 2018 received significantly less compensation than this limitation. The Board has determined that such limitation is meaningful, reasonable and reflects good corporate governance practices.

At a Director’s option, the portion of the annual Board retainer fee for service paid in the form of cash may be paid in the form of additional RSUs. All RSUs granted to Directors vest immediately upon grant, but are not settled (i.e., paid out in the form of common stock) until one year after the date of the grant, unless a Director elects deferred settlement. As set forth in our Stock Incentive Plan, Directors may elect to defer the settlement of their RSUs until six months following the date their service on the Board has ended. If a Director elects the deferral option, he or she also may elect to take distribution of the shares upon settlement in a single distribution or in annual installments not to exceed 15 years. Prior to settlement, the holder of an RSU is entitled to receive the value of all dividends and other

 

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distributions paid or made on our common stock in the form of additional RSUs, but does not otherwise have any of the rights of a stockholder, including the right to vote the shares underlying the RSUs. The following chart illustrates the composition of our Board retainer:

 

 

Annual Board Retainer: Cash v. Equity

 

LOGO

 

Our Non-Executive Chair, each Director who chairs a committee of the Board of Directors, and each member of the Audit Committee receives an additional annual retainer. These additional annual retainers are as follows:

 

Chair Position             Additional Annual Retainer  
     

Non-Executive Chair of the Board

 

          

$75,000

 

Audit Committee

 

          

$27,500(1)

 

Corporate Sustainability Committee

 

          

$10,000

 

Finance Committee

 

          

$15,000

 

Management Development and Compensation Committee

 

          

$20,000

 

Nominating and Governance Committee

 

          

$10,000

 

 

(1)

Consists of $20,000 Chair retainer and additional $7,500 non-chair member cash retainer.

Annual retainers for service as a committee chair or Audit Committee member are paid in cash or, at the Director’s option, in the form of additional RSUs. We reimburse all Directors for the expenses they incur in attending meetings.

Director compensation is paid quarterly. RSUs are issued quarterly at the time the cash compensation is paid and are settled one-for-one (i.e., one RSU equals one share of our common stock) on the settlement date.

Under the Director Deferred Compensation Plan, each year a Director may elect to defer any portion of his or her annual retainer or other director fees that are not paid in the form of RSUs. There are no preferential or above-market earnings in the Director Deferred Compensation Plan, and we do not make any contributions under the plan.

An employee who serves as a Director receives no additional compensation for such service. Mr. Newport is currently the sole employee who also serves on the Board of Directors.

 

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DIRECTOR COMPENSATION TABLE

The following table sets forth the total compensation paid to non-employee Directors during the fiscal year ended December 31, 2018:

 

Name(1)

   Fees Earned or
Paid in Cash
($)
     Restricted Stock
Unit Awards
($)(2)
     All Other
Compensation ($)(3)
     Total ($)  

Dennis C. Cuneo

     $112,083        $117,083        $5,000       $ 234,166  

Sheri H. Edison

     107,708        117,083        5,000         229,791  

Mark G. Essig

     124,583        117,083        5,000         246,666  

William K. Gerber

     129,583        117,083        3,750         250,416  

Gregory B. Kenny

     102,083        117,083        5,000         224,166  

Ralph S. Michael, III

     127,708        117,083        5,000         249,791  

Dr. James A. Thomson

     178,333        117,083        5,000         300,416  

Dwayne A. Wilson

     102,083        117,083               219,166  

Vicente Wright

     109,583        117,083        5,000         231,666  

Arlene M. Yocum

     109,583        117,083        5,000         231,666  

 

(1)

Mr. Newport, our Chief Executive Officer, is not included in this table because he is an employee and thus receives no compensation for his service as a Director. The compensation Mr. Newport received for his service as an employee is reported in the Summary Compensation Table beginning at page 82.

(2)

The amounts in this column reflect the aggregate grant date fair value of RSUs granted in 2018, computed in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC Topic 718”). The average of the high and low selling price of our common stock on the date the fee is to be paid is used to calculate the number of RSUs to be issued. The actual number of RSUs granted each quarter is calculated by dividing the quarterly annualized amount (e.g., $30,000) by the average of the high and low sales price of our common stock on the grant date. For 2018, Messrs. Cuneo, Essig, Kenny and Wright elected to defer settlement of their RSUs until six months following the date they complete their service on the Board. As of December 31, 2018, non-employee Directors had the following aggregate number of RSUs outstanding (rounded to the nearest whole number): Mr. Cuneo, 153,714; Ms. Edison, 24,009; Mr. Essig, 105,279; Mr. Gerber, 24,009; Mr. Kenny, 103,776; Mr. Michael, 24,009; Dr. Thomson, 29,788; Mr. Wilson, 24,009; Mr. Wright, 36,793; and Ms. Yocum, 24,009.

(3)

The amounts in this column constitute matching charitable gift donations made by the AK Steel Foundation pursuant to a matching gift program. Under this program, our employees and Directors are eligible for matching contributions by the Foundation of up to $5,000 per person per calendar year to qualifying charitable institutions.

 

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STOCK OWNERSHIP

Directors and Executive Officers

The table below provides stock ownership information as of March 25, 2019, with respect to the beneficial ownership of our common stock by: (i) each Named Executive Officer listed in the Summary Compensation Table beginning on page 82, (ii) each current Director and each nominee for election as a Director, and (iii) all of our current and nominee Directors and Executive Officers as a group.

 

Directors and Executive Officers

  Common
Shares Owned
(1)
    Percentage of
Outstanding
Shares(2)
    Restricted
Stock
    Units(3)    
    Shares
Owned
 Beneficially 
 

Joseph C. Alter

    178,776       *         0       178,776  

Dennis C. Cuneo

    15,712       *         166,729       182,441  

Sheri H. Edison

    85,015       *         32,229       117,244  

Mark G. Essig

    40,784       *         118,295       159,079  

William K. Gerber

    137,713       *         32,229       169,942  

Gregory B. Kenny(4)

    0       *         116,791       116,791  

Scott M. Lauschke

    95,812       *         0       95,812  

Ralph S. Michael, III

    173,368       *         32,229       205,597  

Roger K. Newport

    1,290,360       *         0       1,290,360  

Kirk W. Reich

    577,767       *         0       577,767  

Dr. James A. Thomson(5)

    140,281       *         38,007       178,288  

Jaime Vasquez

    239,319       *         0       239,319  

Dwayne A. Wilson

    22,236       *         32,229       54,465  

Vicente Wright

    104,269       *         49,808       154,077  

Arlene M. Yocum

    22,236       *         32,229       54,465  

All current and nominee Directors and current Executive Officers as a group (22 persons)

    4,100,512       1.3     650,773       3,774,423  

 

(1)

For Executive Officers, this column includes stock options to purchase shares of common stock exercisable before May 23, 2019, as follows: Mr. Alter, 83,033 shares; Mr. Lauschke, 28,200 shares; Mr. Newport 596,391 shares; Mr. Reich, 291,566 shares; and Mr. Vasquez, 96,626 shares. All outstanding stock options exercisable before May 23, 2019, are included in these totals, regardless of whether their exercise price was above or below the price of our common stock as of March 25, 2019.

 

(2)

An asterisk indicates ownership of less than 1%.

 

(3)

A significant portion of the effective equity ownership by our Directors is in the form of RSUs, which do not satisfy the definition of “shares beneficially owned” for purposes of this table and therefore are not included in the Common Shares Owned column in this table. An RSU is a grant valued in terms of stock and vests immediately, but no actual shares of stock are issued at the time of the grant. The amount in this column reflects the aggregate number of RSUs held by each Director as of March 25, 2019.

 

(4)

Mr. Kenny has elected to defer settlement of all RSUs granted to him thus far during his tenure as a Director. The shares underlying all of these RSUs vested immediately upon grant, but will be issued upon his retirement from the Board.

 

(5)

Dr. Thomson will retire from the Board following our Annual Meeting on May 23, 2019.

 

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Other Beneficial Owners

The table below provides information with respect to each person known by us as of March 25, 2019, to own beneficially more than 5% of our outstanding common stock:

 

Name and Address of Beneficial Owner

   Shares Owned
Beneficially
       Percentage of
Outstanding Shares
 

BlackRock, Inc.

         45,940,049(1)          14.50

55 East 52nd Street

       

New York, NY 10022

       

The Vanguard Group, Inc.

     32,116,015(2)          10.16

100 Vanguard Blvd.

       

Malvern, PA 19355

       

State Street Corporation

     16,790,792(3)          5.3

State Street Financial Center

       

One Lincoln Street

       

Boston, MA 02111

       

 

(1)

Based on information contained in a statement on Schedule 13G (Amendment No. 8) dated January 24, 2019, and filed January 24, 2019, BlackRock, Inc. has sole dispositive power over 45,940,049 shares and sole voting power over 45,146,910 shares of our outstanding common stock.

 

(2)

Based on information contained in a statement on Schedule 13G (Amendment No. 11) dated February 11, 2019, and filed February 11, 2019, The Vanguard Group, Inc. has sole voting power over 305,393 shares, shared voting power over 52,700 shares, sole dispositive power over 32,116,015 shares, and shared dispositive power over 326,593 shares of our outstanding common stock.

 

(3)

Based on information contained in a statement on Schedule 13G dated February 11, 2019, and filed February 13, 2019, State Street Corporation has shared dispositive power over 16,790,792 shares and shared voting power over 15,745,676 shares of our outstanding common stock.

Equity Compensation Plan Information

The table below provides information, as of December 31, 2018, with respect to compensation plans under which our equity securities are authorized for issuance. All such plans have been approved by security holders.

 

Plan Category

   Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
     Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
     Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in First Column)
 

Equity compensation plans approved by security holders

     3,403,862      $ 6.90        5,700,196  

 

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SUSTAINABILITY AND CORPORATE RESPONSIBIILTY

Under the leadership of our Board and Corporate Sustainability Committee, we are committed to operating in a sustainable manner and being a responsible corporate citizen for the benefit of our shareholders, customers, investors, employees, environment and the communities in which we live and work. Beyond ensuring that we are acting responsibly to serve these key stakeholders, operating sustainably also provides us opportunities to grow our business; lower our costs through the use of less energy and fewer natural resources; increase customer collaboration and loyalty; attract, retain and motivate employees; and differentiate us from our steel and non-steel competitors, among other benefits.

In April 2019, we issued our 2018 Sustainability Report, which provides significantly increased disclosure and transparency regarding our corporate-wide sustainability efforts and highlights our efforts to support our employees, encourage diversity and inclusion, contribute to our communities, and demonstrate our commitment to the environment. We also disclose our steelmaking operations’ renewable and nonrenewable energy consumption, water usage and water recycle rates, air emissions, waste generation and waste recycle rates, as well as targets for reducing our environmental footprint. In addition, our Sustainability Report includes our scope 1 greenhouse gas emissions, which are generally direct emissions from owned or controlled sources, and reduction targets for those emissions. Our Sustainability Report (which is not incorporated into this Proxy Statement) can be found in the “Corporate Citizenship” section of our website at https://www.aksteel.com/about-us/corporate-citizenship/sustainability.

Commitment to Safety

At AK Steel, safety comes first and over time we have been the safest major steel company in America. Our occupational health and safety policies and programs are the cornerstone of our operating philosophy and are integrated into all of our daily operations and activities. We rigorously manage, control and focus on eliminating or minimizing potential exposure to the hazards associated with making and working with steel. Our 2018 performance at our steelmaking facilities (year-to-date through the third quarter, which is the latest industry information currently available), measured as the number of U.S. OSHA recordable injuries per 200,000 labor hours, was 0.64, which was more than two times better than the industry average.

 

 

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Although our 2018 safety performance when measured in terms of Days Away, Restricted and Transfer (“DART”) cases was strong when compared to others in our industry, it did not meet our incredibly high expectations. DART cases occur when an employee misses work or is reassigned or transferred from normal work duties due to a workplace injury. In 2018, our DART performance, measured as the number of DART injuries per 200,000 labor hours, was 0.35, which was above our 2017 DART frequency of 0.21. We have redoubled our efforts on the safety front and, consistent with our focus on continuous improvement across all areas of the business, we are committed to improving our safety performance in 2019 and exceeding our own high standards.

 

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In 2018, our operations were again recognized by a number of organizations for outstanding safety performance. In May, the American Coke and Coal Chemicals Institute, a leading industry trade organization, granted both our Middletown Works and our Mountain State Carbon coke plants the Max Eward Safety Award for operating the safest cokemaking facilities in America. In July, our Coshocton Works and Zanesville Works both received the “Special Award for Safety” from the Ohio Bureau of Workers’ Compensation, division of Safety and Hygiene (“Ohio BWC”), recognizing more than 500,000 hours and at least six months without an injury resulting in a day or more away from work. Also during the year, Zanesville Works received the Ohio BWC’s “100% Award,” recognizing zero injuries or illnesses resulting in a day or more away from work during the previous year.

Commitment to the Environment and Sustainable Operations

We are unwavering in our commitment to responsible environmental performance throughout our operations. In 2018, we experienced another year of outstanding environmental performance overall, as well as setting records at several of our individual facilities. The International Organization for Standardization (“ISO”) has certified all of our steelmaking plants with the ISO 14001 environmental management certification, and our environmental affairs professionals oversee environmental compliance throughout our organization. In 2018, we achieved our goal of transitioning all of our steelmaking plants to the new, more demanding ISO 14001 standard by the end of the year. We also invest heavily in updated pollution control equipment to help meet our environmental objectives. For example, in 2018, we spent $126.1 million to operate and maintain our environmental controls and invested $7.2 million in environmental projects. The following sections provide additional details on aspects of our environmental performance and operations during 2018.

Clean Air

In 2018, we had over 2,000,000 air permit requirements under the Clean Air Act, and we measured our performance against every one of them. During the course of the year, we set new plant records for clean air compliance at three of our facilities: Coshocton Works, Mansfield Works and Zanesville Works. Our overall compliance rate as a company exceeded 99.99%. We are particularly proud of the achievements that we have made to improve the air permit performance of Dearborn Works since our acquisition. In 2013, the last year that Dearborn Works was operated under its former ownership and not AK Steel, it experienced over 24,000 air permit deviations. In 2018, the fourth full year of AK Steel’s ownership, Dearborn Works experienced only 23 deviations. Although we strive for zero deviations at all of our facilities, this performance represents over a 99.9% improvement for air permit performance at Dearborn Works since we acquired the plant.

Clean Water

Under the Clean Water Act, across all of our steelmaking facilities we recorded only five water discharge permit exceedances in 2018, which we believe was our second best performance in recent company history. Six different facilities set or tied their previous records with zero water discharge exceedances for the year. In particular, we reached significant achievements at our Mountain State Carbon cokemaking plant. In 2013, the last year that Mountain State Carbon was operated under its former ownership and not by AK Steel, it experienced 30 water discharge exceedances. In 2018, the facility recorded zero exceedances.

Certain production units in our operations are inherently water-intensive. However, we continuously seek opportunities to reduce water usage and increase water reuse and recycling at our steelmaking plants. For example, our Middletown Works, which is one of our most water-intensive operations, reuses approximately 92% of its water. This facility reuses approximately 52 billion gallons of water annually, which equates to roughly 100,000 gallons every minute.

 

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Waste Management and Energy Efficiency – Reuse and Recycling

We strongly believe in reducing waste across our operations by reusing, reducing or recycling energy and materials whenever possible. Steel is the most recycled material on the planet—more than aluminum, plastic, paper and glass combined each year—which provides a strong foundation for our sustainability efforts across the company. We are in the midst of implementing a Total Waste Management process for our steel operations, which will facilitate managing our operations’ waste in a more sustainable manner, including more opportunities to recycle waste in lieu of disposing of it.

 

 

LOGO

We also seek to reuse and recycle energy whenever possible, reducing our net impact on the environment. For example, we routinely reuse energy by re-using byproduct gases from our iron and cokemaking operations, thereby reducing our natural gas use. Our Dearborn Works, for instance, produced over 10.5 trillion BTUs of energy in 2018, all of which was re-used at the plant’s operations or by third party boilers to make steam and electricity. In 2018, our beneficial reuse of these byproduct gases throughout the company produced the equivalent energy of 27.2 billion standard cubic feet of natural gas.

We are constantly looking for ways to increase energy efficiency while remaining competitive in the global steel marketplace. For example, through the American Iron and Steel Institute (“AISI”), we participate in the Department of Energy’s (“DOE”) Climate VISION agreement. This program assists domestic steelmakers in their continued efforts to lead the global steel sector in voluntary emissions reductions. We are also a member of the federal ENERGY STAR program, which identifies and promotes energy-efficient products to help reduce greenhouse gas emissions. ENERGY STAR is a joint program of the EPA and DOE, helping businesses and consumers save money and protect the environment through energy-efficient products and practices.

 

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Addition of Environmental Component to 2018 Annual Incentive Plan

In January 2018, in order to emphasize the importance of sustainability and environmental responsibility at AK Steel and to continue to drive improved performance, our Board of Directors added an environmental performance component into our annual incentive plan for 2018. After assessing a variety of potential performance categories to incorporate, including an evaluation of areas most ripe for improvement, the Board chose to include air permit deviation events as an additional category for measuring performance under our annual incentive plan for 2018. An air permit deviation event occurs when an event at our operations results in noncompliance under the Title V air permits that govern our facilities. In 2018, we achieved our target goal of no more than 37 air permit deviation events, recording only 29 such events. All plants also achieved their respective targets with the exception of Middletown Works due largely to a raw material trial at the blast furnace.

Commitment to Climate Change Initiatives

We have recently elected to pursue a path of enhanced disclosure on greenhouse gas emissions from our steelmaking operations and to target emissions reductions consistent with the Paris Climate Agreement. During 2018, we completed an inventory of our scope 1 greenhouse gas emissions (generally defined as direct emissions from owned or controlled sources) at our steelmaking plants and adopted time-bound, quantitative targets for reducing scope 1 greenhouse gas emissions. More detail on our greenhouse gases can be found in our aforementioned 2018 Sustainability Report, which can be found on our website. By the end of 2021 we intend to complete an inventory of our scope 2 greenhouse gas emissions at our steelmaking plants and, by the end of 2022, to publicly disclose that information annually.

As with other companies engaged in the production of steel, certain aspects of our production process are carbon-intensive and current technology does not afford us the ability at this time to dramatically lower our direct greenhouse gas emissions without significantly reducing the scope of our operations. However, we and other steel producers in the United States are actively participating in research and development to create and improve technology, processes and approaches that reduce emissions during the steelmaking processes, but these developments are likely to occur over the longer term.

We are also a member of the Carbon Capture Coalition (“CCC”). The CCC is a nonpartisan coalition supporting the deployment and adoption of carbon capture technology. The coalition consists of a broad and diverse range of participants, including energy, industrial, and technology companies, labor unions, and environmental and energy policy organizations. The CCC was launched in 2011 to help realize the full potential of carbon capture as a national energy, economic, and environmental strategy.

In addition, we will continue to educate governments, the automotive industry—our core market—and other key stakeholders that steel is the most sustainable metal to reduce greenhouse gas emissions through the life cycle of a vehicle. The production phase of steelmaking is less carbon-intensive than the processes for producing certain other competing materials, such as aluminum. Thus, while the corporate average fuel economy, or “CAFE”, standards, have motivated some automotive manufacturers to use aluminum in certain vehicles to help achieve lightweighting goals, new leading-edge products like our advanced steel products for lightweighting provide solutions for those willing to look beyond vehicle tailpipe emissions alone.

Strategic Growth Opportunities Related to Climate Change

Beyond being a sound business strategy, our efforts to create new innovative steels and improve existing steel products enable us to contribute to carbon reduction efforts and the achievement of sustainability goals for our customers down the product supply chain. Innovative products in each of

 

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our carbon, stainless, electrical and tubular steel families, as well as our advanced automotive stamping solutions, further the sustainability goals of many of our customers. In the automotive market our customers are benefiting from our advanced high strength carbon steels and stamping solutions for lightweighting to meet their heightened fuel economy targets under the CAFE standards. We are also providing customers with stainless steel and tubular solutions that allow for greater heat resistance in vehicle exhaust systems, enabling exhaust systems to handle the higher engine exhaust temperatures needed for increased fuel economy. In addition, we continue to develop higher-efficiency, non-oriented electrical steel products for use in future hybrid and electric vehicles and grain-oriented electrical steel (“GOES”) products for their required infrastructure, a market that we anticipate will grow over time. Our steels also contribute to sustainability goals beyond the automotive market. For instance, our GOES products are among the highest-efficiency electrical steels in the world. These GOES products provide low core loss and high permeability to move electricity across electrical grids in the U.S. and around the world more efficiently through better-performing electrical transformers.

Commitment to our Communities

We believe that part of being a responsible corporate citizen is improving the communities where our employees live and work. This commitment spans a wide variety of activities and engagement, both in terms of our employees’ volunteerism and monetary donations on behalf of our company and by our employees, aimed at strengthening our neighborhoods and communities.

Through the AK Steel Foundation, we are able to make a positive impact on the communities where our employees work and live. In addition to providing direct support to nonprofits, the AK Steel Foundation supports the United Way in all of our plant communities. Over the years, the AK Steel Foundation has donated millions of dollars to the United Way – helping the organization fund childhood education programs, improve the health and independence of people in the community and help families in need achieve financial stability. In 2018, the AK Steel Foundation provided approximately $1.5 million to a wide variety of worthy causes in our communities. Among many notable initiatives is the Sons and Daughters Scholarship Program, in which the AK Steel Foundation awards competitive college scholarships to twenty children of company employees each year. The AK Steel Foundation also annually awards the Louie F. Cox Scholarship, which benefits African-American students who live or will graduate from schools in areas close to our corporate headquarters. It also sponsors the Steel Magnolia Awards, which honor women of all ages who face personal adversity and have shown exceptional strength, courage, compassion and leadership through their work in support of their communities. In addition, in 2018 the AK Steel Foundation Matching Gift Program enabled every employee and Director to increase the value of their charitable contributions each year by matching employee contributions to 501(c)(3) organizations up to $5,000 in the aggregate per employee or Director. Numerous organizations benefit from the program, including universities, arts organizations and agencies providing health and human services, among others.

Beyond the AK Steel Foundation, we and our employees are making a positive social impact. Launched in 2016, the AK CARES Program was created to encourage employees to give back to their community through a variety of volunteer efforts. Through the program, employees donate countless volunteer hours to local charitable efforts to demonstrate that AK CARES about our neighbors and our region. Employees share their time and talent at food banks, schools, health and human service organizations and many other agencies supporting needs in their local community.

 

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Table of Contents

 

            Page No.    
  Highlights of 2018 Pay-For-Performance Executive Compensation Program   43
I.   Overview of AK Steel Executive Compensation Program   45
 

Key Executive Compensation Program Elements

  45
 

Named Executive Officers

  45
 

Contextual Information for 2018 Executive Compensation

  45
 

Impact of Prior Years’ Performance on 2018 Compensation Considerations

  45
 

Factors That Influenced 2016–2018 Long-Term Incentive Compensation Decisions

  46
 

Factors that Influenced 2018 Annual Incentive Compensation Decisions

  47
 

2018 Business Performance and Impact on 2018 Compensation

  48
 

Net Impact of 2018 Performance: Our Best Financial Results in a Decade Drove Favorable Pay-for-Performance Compensation; Program Further Strengthened to Increase Management Alignment with Stockholder Returns

  48
 

Overview of Key Pay-for-Performance Components and Application to 2018 Executive Compensation

  50
 

Annual Plan

  50
 

Long-Term Plan

  51
 

Performance Shares

  51
 

Stock Options

  52
 

Overview of Other Key Compensation Components and Application to 2018 Executive Compensation

  52
II.   Full Discussion and Analysis of Executive Compensation Program   53
 

Who has the direct responsibility for determining executive compensation?

  53
 

Summary of Key Takeaways

  53
 

Discussion

  53
 

What is our compensation philosophy?

  54
 

Summary of Key Takeaways

  54
 

Discussion

  54
 

Did the Committee make any significant structural changes to the executive compensation program?

  55
 

Summary of Key Takeaways

  55
 

Discussion

  55
 

Did the Committee make any changes to the specific performance metrics under the Annual Plan?

  56
 

Summary of Key Takeaways

  56
 

Discussion

  56
 

Do we reach out to stockholders to solicit their views on our executive compensation program?

  57
 

Summary of Key Takeaways

  57
 

Discussion

  57
 

What specific governance policies and practices do we have that impact executive compensation?

  58
 

Summary of Key Takeaways

  58
 

Discussion

  58

 

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            Page No.    
 

How does the Committee determine executive compensation?

  59
 

Summary of Key Takeaways

  59
 

Discussion

  60
 

What actions did the Committee take in 2018 regarding the key elements of our executive compensation program for the NEOs and what were the principal reasons for those actions?

  62
 

Summary of Key Takeaways

  62
 

Discussion

  62
 

What pension, post-termination and other benefits are provided to Executive Officers?

  73
 

Summary of Key Takeaways

  73
 

Discussion

  73
 

What is our Policy on Deductibility of Executive Compensation?

  79
 

Summary of Key Takeaways

  79
 

Discussion

  79

III.

  Shareholder outreach program and consideration of stockholder “say-on-pay” voting results   79

 

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Highlights of 2018 Pay-For-Performance Executive Compensation Program

 

 

Pay-for-performance is the foundational principle of our executive compensation program. Our Board of Directors and its Management Development and Compensation Committee (“Committee”) evaluate each major executive compensation decision as to whether it incentivizes executive management to create long-term value for our shareholders.

 

 

In 2018, we achieved our best financial results since 2008, delivering $216.8 million of net income under the terms of the Omnibus Management Incentive Plan (“OMIP). Under our annual incentive plan, the Named Executive Officers (“NEOs”) earned awards at 166% of target for 2018.

 

 

2018 was the third full year under the new leadership team that took the helm at AK Steel in the beginning of 2016 under extremely challenging circumstances. During this three-year period, Management stabilized the company and undertook strategic actions to enhance margins and improve financial performance through the cycle. These actions resulted in AK Steel generating our highest cumulative adjusted EBITDA for any three-year period in the past decade.

 

   

Under our long-term incentive plan, our three-year cumulative adjusted EBITDA for the 2016 to 2018 performance cycle—or earnings before interest, taxes, depreciation and amortization—of $1,490 million exceeded the target goal, but fell short of the maximum goal, as the NEOs earned awards under the Long-Term Plan at 196% of target.

2018 Target Total Direct Compensation Levels for the CEO and Other NEOs

 

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In January 2018, the Committee incorporated significant pay-for-performance enhancements to the compensation program, including:

 

   

Changing the Long-Term Plan from being 100% cash denominated to 30% stock denominated and 70% cash denominated to enhance the weighting of performance-based equity

 

   

Increasing the weighting on relative performance by establishing relative total shareholder return as the sole metric for performance share awards and eliminating the absolute stock price compounded annual growth rate metric

 

   

Closing the Executive Retirement Income Plan to new participants and replacing it with a more modest supplemental retirement plan

 

   

Increasing the Chief Financial Officer’s required target stock ownership level under our Stock Retention Guidelines

 

   

Holding most of our NEOs’ base salaries flat for 2018, including the base salaries for our CEO and President and COO

 

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Despite our strong financial results for the annual and three-year performance periods ending in 2018, our stock performance for 2018 was not satisfactory to our Board or Management. Accordingly, in January 2019, the Committee proactively incorporated the following additional changes to further strengthen management’s alignment with our shareholders by:

 

   

Reducing all NEO equity grant values for 2019 by 30% to 35%

 

   

Further increasing the stock component of the Long-Term Plan to 50% denominated in AK Steel stock from 30%

 

   

Applying the aforementioned 30% to 35% reduction in 2019 NEO equity grant values to the 50% stock denominated portion of the Long-Term Plan, thereby reducing the value of this component of NEO compensation

 

   

Not increasing base salaries or target cash compensation for most NEOs in 2019, including the CEO, the President and COO, and the CFO

 

 

The table below summarizes the actual payouts under our principal incentive plans—the annual incentive plan, the long-term incentive plan and performance shares—over the past five- and ten-year periods, as a percentage of target for each plan’s performance period ending that year.

 

 Year                                         

           Annual Plan                       Long-Term Plan                     Performance Shares        

 2009

    20     200     178

 2010

    12     0     0

 2011

    46     0     0

 2012

    20     0     0

 2013

    20     0     0

 2014

    20     0     0

 2015

    50     0     0

 2016

    198     76     160

 2017

    134     88     0

 2018

   

 

166

 

 

   

 

196

 

 

   

 

63

 

 

 Five-Year Average (2014 – 2018):

 

 

 

 

 

114

 

 

% 

 

 

 

 

 

 

72

 

 

% 

 

 

 

 

 

 

44

 

 

% 

 

 Ten-Year Average (2009 – 2018):

 

 

 

 

 

69

 

 

% 

 

 

 

 

 

 

56

 

 

% 

 

 

 

 

 

 

40

 

 

% 

 

 

 

In addition, as a result of the company’s stock price decline during 2018, (i) nearly all outstanding stock options were “underwater” (i.e., below the respective option exercise prices) as of December 31, 2018, and (ii) none of the performance share grants for the 2017–2019 and 2018–2020 performance cycles would have been earned based on the stock price as of December 31, 2018.

 

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I.

Overview of AK Steel Executive Compensation Program

Key Executive Compensation Program Elements

The key elements of our executive compensation program for our Executive Officers are:

 

   

base salary

 

   

annual performance-based incentive awards (“Annual Plan”) under the OMIP

 

   

long-term performance-based incentive awards (“Long-Term Plan”) under the OMIP (which replaced the Long-Term Performance Plan in 2017 for three-year performance periods beginning in 2018)

 

   

awards of stock options, restricted stock and performance shares under our Stock Incentive Plan (“Stock Plan”)

 

   

certain employee benefits and post-employment benefits

Named Executive Officers

For purposes of this CD&A, the term “NEOs” refers to the following in reference to 2018:

 

   

Roger K. Newport — Chief Executive Officer (“CEO”)

 

   

Kirk W. Reich — President and Chief Operating Officer (“COO”)

 

   

Jaime Vasquez — Vice President, Finance and Chief Financial Officer (“CFO”)

 

   

Joseph C. Alter — Vice President, General Counsel and Corporate Secretary

 

   

Scott M. Lauschke — Vice President, Sales and Customer Service

Contextual Information for 2018 Executive Compensation

The year 2018 was the current Executive Management team’s third year leading the company, following a multi-year succession planning process that resulted in Mr. Newport assuming the role of CEO and Mr. Reich becoming President and COO. The Executive Management team undertook leadership of the Company at a turbulent period in our history in January 2016, when both we and others in our industry were facing existential challenges. During the first two years, we made significant strides on a number of financial, operational and business fronts to stabilize the Company and create a foundation for growing shareholder value over the long run. In 2018, this foundation enabled us to deliver our strongest financial results in a decade for both the one-year and three-year periods.    

Impact of Prior Years’ Performance on 2018 Compensation Considerations

The executive compensation data included in this Proxy Statement is for the 2018 fiscal year. The decisions by the Committee that laid the foundation for the annual components of 2018 executive compensation occurred in March 2018—over 14 months prior to the upcoming 2019 Annual Meeting—and were therefore based in large part on our 2017 performance. Similarly, the Committee’s decisions relating to long-term executive compensation were made in March 2016—over three years before the 2019 Annual Meeting—and were therefore significantly influenced by our 2015 performance. Thus, in order to understand the Committee’s decisions that shaped overall executive compensation for 2018, we believe a brief overview of the relevant business and market conditions in those periods may be helpful for context.

 

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Factors That Influenced 2016–2018 Long-Term Incentive Compensation Decisions

The Committee established the NEOs’ long-term incentive compensation targets applicable to awards earned in 2018 over three years ago in March 2016. At that time, as the Committee evaluated compensation decisions for the long-term incentive period, the Company was facing tremendous challenges. Our common stock and senior debt were trading at multi-year lows and reflected the tumultuous business and market conditions that had forced steel prices and capacity utilization rates to significantly depressed levels. Throughout 2015 and into 2016, steel prices had been driven to dramatically depressed levels, as producers in countries with excess steel production—most notably, China—flooded the U.S. market with unfairly-traded imports. These turbulent conditions resulted in a 2015 net loss exceeding $500 million.

In the face of these significant challenges and an uncertain future for the company, the Finance Committee of the Board worked closely with senior Management to evaluate the Company’s annual and multi-year projections and the outlook on market conditions, including sensitivities for various key assumptions. Ultimately, Management presented an annual business plan to the Board, along with perspectives on the longer-term view of the business. However, all of these projections were shrouded in uncertainty in light of the upheaval facing us and the industry as a whole. The Committee reviewed and discussed the business plan and estimates for future years, ultimately selecting long-term incentive goals for the threshold, target and maximum levels for the 2016–2018 period that appeared quite challenging in light of the significant tumult we and our industry faced at that time. In fact, the Committee set a target level under the long-term plan of $1.25 billion of cumulative EBITDA, thereby requiring a very meaningful improvement of approximately 35% over the $928 million1 of cumulative EBITDA generated by the company in the prior three-year period (2013–2015).

 

 

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In addition, when considering the target level under our Long-Term Plan in March 2016, the Committee also reflected upon the actual results from the prior fiscal year, 2015. We generated only $180 million of adjusted EBITDA in 2015. The target level set by the Committee for the 2016–2018 Long Term Plan performance period was $1.250 billion of cumulative EBITDA, which would require over a 48% compounded annual growth rate from our 2015 actual adjusted EBITDA.

 

1 

On January 1, 2018, we changed our accounting method for valuing inventories to the average cost method for inventories previously valued using the last-in, first-out (“LIFO”) method. More information on that subject is set forth in footnote 2 below. With the exception of the figure provided for cumulative EBITDA generated by the company in the prior three-year period (2013–2015), the effects of the change in accounting method from LIFO to average cost have been retrospectively applied to all periods presented in all sections of this Proxy Statement. We have provided the $928 million of cumulative EBITDA generated by us from 2013–2015 without adjustment because this was the actual amount considered by the Committee in January 2016 when they selected our performance targets for the 2016–2018 long-term incentive plan performance period.

 

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Factors That Influenced 2018 Annual Incentive Compensation Decisions

The Committee established the NEOs’ annual incentive compensation targets in March 2018 and, as such, its decisions were significantly influenced by our performance in 2017. We performed relatively well in 2017 and largely overcame a softening of our core automotive market, rising costs for raw materials and steelmaking supplies like graphite electrodes, and major planned maintenance outages. During 2017, we also began to execute our strategy of diversifying into downstream applications by acquiring Precision Partners Holding Corporation (“Precision Partners”), which provides advanced-engineered solutions, tool design and build, hot- and cold-stamped components and complex assemblies for the automotive market. As a result of these factors, in 2017 we generated net income of $103.5 million2 and adjusted EBITDA of $528.5 million, both of which were improvements from 2016.

As the Committee evaluated what incentive targets should be established for 2018 executive compensation, it weighed other factors beyond our 2017 performance. Chief among these considerations was a projected slowdown in domestic automotive production, which in recent prior years had reached historic highs. In addition, during 2017, the U.S. Commerce Department initiated an investigation under Section 232 of the Trade Expansion Act into whether imports of foreign steel into the U.S. posed a threat to national security. Section 232 had not been utilized for decades and, accordingly, the announcement and subsequent investigation created a significant amount of uncertainty and turbulence in the steel market. As 2017 ended and 2018 began, the Section 232 investigation was ongoing and the outcome, as well as the impacts on our business and the steel market generally, were impossible to predict. The Committee therefore sought to balance its expectation that Management continue to improve the company’s financial results with the cloud of uncertainty from a projected slowdown in our core market of automotive and the potential positive and negative market impacts from a wide variety of possible outcomes of the pending Section 232 investigation into steel imports. Ultimately, after a rigorous business planning process overseen by the Finance Committee of the Board, the Committee set a challenging target under the annual incentive plan, requiring net income of $155 million, which represented an approximately 50% improvement over the prior year’s actual result. This annual incentive plan target included almost $60 million of unidentified “stretch” that Management would be required to overcome to meet the goal set by the Committee, creating a substantial financial hurdle for Management.

 

 

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2 

On January 1, 2018, we changed our accounting method for valuing inventories to the average cost method for inventories previously valued using the LIFO method. We believe that the average cost method is preferable since it improves comparability with our peers, more closely tracks the physical flow of our inventory, better matches revenue with expenses, and aligns with how we internally manage our business. The effects of the change in accounting method from LIFO to average cost have been retrospectively applied to all periods presented in all sections of this Proxy Statement. For more information related to the change in accounting principle, please see Note 2 to our consolidated financial statements in our Annual Report for the year ended December 31, 2018.

 

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2018 Business Performance and Impact on 2018 Compensation

In 2018, we generated our highest financial results in a decade and further strengthened our balance sheet. We expanded our portfolio of steel solutions, as our steel operations accelerated collaboration with our downstream stamping, tooling and tubing businesses at Precision Partners and AK Tube. We delivered our best financial performance in the past ten years on several fronts, including generating (i) net income of $186.0 million, or $0.59 per diluted share; (ii) adjusted net income of $200.5 million, or $0.64 per diluted share; and (iii) adjusted EBITDA of $563.4 million (adjusted net income and adjusted EBITDA are defined in the Non-GAAP Financial Measures section, which is attached as Annex B to this Proxy Statement and which includes reconciliations for all non-GAAP financial measures referenced in this Proxy Statement). Each of these marked an improvement from our performance in 2017 and prior years, as shown in the below charts. Although the tables below illustrate our non-GAAP adjusted net income and adjusted EBITDA for the years 2013 through 2018, our GAAP net income (loss) for these years was ($60.2) million, ($114.2) million, ($652.3) million, ($16.8) million, $103.5 million and $186.0 million, respectively.

 

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Additionally, during the course of the year we continued to reduce our leverage and long-term liabilities. We reduced our outstanding long-term debt by $116.4 million and our total pension and other postretirement benefit obligations by $65.7 million. We also took proactive steps to further de-risk exposure to our pension plan by transferring $278.8 million of pension obligations for approximately 5,400 retirees or their beneficiaries to a highly rated insurance company.

Despite delivering our strongest financial results in the past decade, our stock price did not perform as we hoped in 2018, with its decline accelerating significantly at the end of the year, and disappointed both our Board and Management. This was particularly disheartening in light of the fact that our average share price in 2018 was $4.56, which was more than double the per share price on January 20, 2016, the date the Committee set the performance share targets. Furthermore, during the three-year period since our Executive Management team took the helm on January 2, 2016, our average stock price was $5.33, an increase of over 225% from the price on January 2, 2016, and during the period the stock price rose as high as $11.11 per share, an increase of approximately 473% from January 2, 2016.

Net Impact of 2018 Performance: Our Best Financial Results in a Decade Drove Favorable Pay-for-Performance Compensation; Program Further Strengthened to Increase Management Alignment with Stockholder Returns

The foundational principle of our executive compensation program is ensuring alignment between pay and performance to incentivize our Management team to maximize long-term shareholder returns. Our Annual Plan and Long-Term Plan are measured by metrics based on operating

 

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performance (adjusted net income and adjusted EBITDA, respectively), which typically drive our stock price over time. In 2018, we delivered our best financial results in a decade and performed well in other areas that are vital to the long-run success of our business. For the year, we surpassed our target goal for financial performance, achieving net income of $216.8 million under the terms of the Annual Plan. For the long-term incentive period of 2016–2018, we generated cumulative adjusted EBITDA of $1.49 billion under the Long-Term Plan. Under the Stock Plan, we earned less than two-thirds of the target amount of performance shares.

In sum, for 2018 and the three-year performance periods ending in 2018:

 

   

Annual Plan payments were earned at 166% of target;

 

   

Long-Term Plan payments were earned at 196% of target; and,

 

   

Performance share awards were earned at 63% of target under the Stock Plan.

The Committee is relentlessly focused on ensuring that the executive compensation program aligns executive pay with our performance. Thus, despite realizing our best financial performance since before the Great Recession, the NEOs only earned a portion of their total potential performance-based compensation as a result of achieving some, but not all, of the challenging financial and other performance goals set by the Committee.

As demonstrated in the below charts, of the CEO’s total potential compensation for 2018, approximately 73% was tied directly to performance-based metrics. For all the NEOs, including the CEO, the performance-based compensation amounted to approximately 73% of their potential total compensation. For purposes of the below charts, performance-based compensation includes the following categories of compensation: (i) incentive payments under the Annual Plan for 2018; (ii) incentive payments under the Long-Term Plan for the three-year performance period ending in 2018; (iii) the grant date value of stock issued pursuant to performance share awards for the three-year performance period ending in 2018; and (iv) the grant date fair value of stock option awards made in 2018. Non-performance based compensation for purposes of the below charts includes (1) 2018 based salary; (2) the grant date value of restricted stock awards made in 2018; and (3) the value of all other compensation paid in 2018.3

Composition of Total Potential Compensation for 2018

 

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3 

The only item referenced in the Summary Compensation Table not included in the referenced charts is the Change in Pension Value for each NEO. That value is excluded because it is not a component of compensation awarded annually by the Committee to the NEOs. Rather, it is a mathematical calculation of the actuarial change in value of the NEO’s pension that is attributable to factors such as a change in the discount rate used to present value the pension benefits or a change in the interest component of the value as a result of the NEO’s change in age relative to the NEO’s assumed retirement date, among other things. For each year reported, the value is simply an actuarial calculation. In none of those years did any NEO realize any cash benefit (or detriment) attributable to the reported change in value.

 

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Data Used for Charts Above

 

    Base Pay1     Restricted
Stock2
    Other
Comp1
    Total Non-
Performance-
based
    Maximum
Annual
Incentive
Plan2
    Maximum
Long-
Term
Plan2
    Stock
Options2
    Maximum
Perfor-
mance
Shares3
    Total
Perfor-
mance-
based
    Total
Potential
 

Newport

  $ 950,000     $ 968,829     $ 86,932     $ 2,005,761     $ 2,375,000     $ 2,280,000     $ 1,010,944     $ 385,758     $ 6,051,702     $ 8,057,463  

Reich

    750,000       333,650       63,203       1,146,853       1,500,000       1,500,000       347,871       117,189       3,465,060       4,611,913  

Vasquez

    475,000       233,358       41,764       750,122       760,000       712,500       243,402       67,599       1,783,501       2,533,623  

Alter

    400,000       106,847       43,979       550,826       560,000       520,000       111,290       40,977       1,232,267       1,783,093  

Lauschke

    325,000       66,861       43,382       435,243       422,500       422,500       69,646       35,235       949,881       1,385,124  

 

(1)

From Summary Compensation Table for 2018 at page 82.

 

(2)

From Grants of Plan-Based Awards Table at page 85.

 

(3)

The value of the performance shares is included in footnote 2 to Summary Compensation Table, performance share grants awarded in January 2016.

Overview of Key Pay-for-Performance Components and Application to 2018 Executive Compensation

Our program’s strong link between executive compensation and company performance is highlighted in the application of the key pay-for-performance components of the program on the NEOs’ 2018 compensation. Those components and their application to the NEOs for 2018 are summarized below.

 

   

Annual Plan

Overview:    Under the terms of the Annual Plan, a participant can earn a performance award based upon our annual performance against goals established for four different performance factors: net income (excluding, in accordance with the Annual Plan, special, unusual and extraordinary items, as discussed further below), quality, safety and sustainability. At the target level, the allocation is 50% for financial performance, 25% for quality, 20% for safety and 5.0% for sustainability. At the maximum level, the allocation of these components of an incentive award is 75% for financial performance, 12.5% for quality, 10.0% for safety, and 2.5% for sustainability. The heavy weighting toward the financial performance component reflects the Committee’s objective of strengthening the commonality of interests between Management and our stockholders, while still recognizing that quality, safety and sustainability are core values that are vital to our long-term business success. The Committee assigns annual goals for each of these performance factors. No award is paid on any performance factor unless we at least meet the threshold goal for that factor.

As applied in 2018:    For 2018, driven by our best financial results in ten years, the NEOs earned 166% of the target award under the Annual Plan, based on our achievements in financial performance, quality, safety and sustainability. We exceeded our target goal for the financial component under the Annual Plan, as we generated net income of $216.8 million (excluding, in accordance with the terms of the plan, special, extraordinary and unusual items, which are discussed below) against a target of $155 million. We had a good year in quality performance in the face of a more difficult product mix and ever-more-challenging customer specifications, as we met the target objective for internal retreats, slab loss and customer claims, while missing the target level of performance for internal rejects and process loss but performing above the threshold level. With respect to safety, we did not perform up to our own industry-leading standards, as we performed above the threshold level but missed our target. Finally, on the sustainability component, we met our target performance for air permit deviation events. For 2018, the target bonus percentages for the NEOs ranged from 65% to 125% of base salary. The dollar value of the award earned by each NEO under the Annual Plan for 2018 is set forth in the notes to the Summary Compensation Table at page 82.

 

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Long-Term Plan

Overview:    Under the Long-Term Plan, a participant can earn a performance award based upon our aggregate three-year cumulative adjusted EBITDA performance (excluding special, extraordinary and unusual items, which are discussed below). The Committee establishes threshold, target and maximum performance goals for each three-year performance period.

As applied in 2018:    For 2018, the NEOs earned 196% of the target award under the Long-Term Plan. Awards under the Long-Term Plan reflected in the 2018 compensation of the NEOs are based on the performance period that began January 1, 2016 and ended December 31, 2018. During this timeframe, we generated EBITDA that was significantly higher than the cumulative EBITDA for the prior three-year period. Thus, our cumulative EBITDA of $1.49 billion (excluding, in accordance with the terms of the plan, special, extraordinary and unusual items, which are discussed below) for the three-year period ending December 31, 2018 was above the target level of $1.25 billion but below the maximum level of $1.50 billion. Under the terms of the Long-Term Plan, each participant is assigned a target bonus percentage, which is applied against the award earned under the plan for the relevant performance period. For 2018, the target award percentages for the NEOs ranged from 65% to 120% of base salary. The long-term award to each NEO reflected in the 2016–2018 Long-Term Plan performance period is set forth in the notes to the Summary Compensation Table at page 82.

 

   

Performance Shares

Overview:    In order to align the interests of senior Management with our stockholders by linking executive compensation to our performance and to appreciation in the market price of our common stock, we make equity grants to our Executive Officers and other key employees under the Stock Plan. The Committee believes that the form of equity grant under our Stock Plan that most directly serves that purpose is the grant of performance shares. Each grant of performance shares is expressed as a target number of shares of our common stock. The number of shares of common stock, if any, actually earned by and issued to an NEO under a performance share award is based upon our stock price performance over a three-year performance period relative to certain threshold, target and maximum performance goals established at the outset of the performance period. Those goals were established for January 2016 using the following performance metrics in equal weight: (a) our relative total stockholder return (“Relative TSR”), defined as price appreciation plus reinvested dividends, if any, during the performance period relative to the total stockholder return during that same period of the companies in the Standard & Poor’s 400 Midcap Index; and (b) the compounded annual growth rate (the “CAGR”) of the price of our common stock over the performance period, using as the base the average closing price of our common stock for the last 20 trading days of the year prior to the beginning of the performance period (e.g. December 2015), then comparing that base price with the average closing price of our common stock for the last 20 trading days of the final year of the performance period (e.g. December 2018). Approximately one third of the total annual equity grant value to each NEO in 2018 was comprised of performance shares.

As applied in 2018:    For 2018, the NEOs earned 63% of the target level for performance shares under the Stock Plan for the 2016 – 2018 period. For the last twenty trading days of December 2018 (the applicable assessment period under the plan), our average stock price was between the threshold and target CAGR goals for the three-year period. The NEOs therefore earned 66.5% of the CAGR component. We likewise performed between the threshold and target on the Relative TSR performance metric for the three-year period, and the NEOs earned 59% of this component.

 

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Stock Options

Overview:    Another component of our compensation program whose value is driven by company performance is stock option grants. These stock options will have a value for a grantee only if the market price of our stock increases above the exercise price (i.e., the market price on the date the option was granted), subject to continued service through the applicable vesting date (subject to limited exceptions, e.g., death, disability or retirement). All options granted typically vest in three equal installments on the first, second and third anniversaries of the grant date and have a 10-year term. The aggregate grant date fair value of all stock option awards to the NEOs in 2018 is set forth in the Summary Compensation Table at page 82.

As applied in 2018:    Approximately one-third of the total annual equity grant value to each NEO in 2018 was comprised of stock options. As of December 31, 2018, the stock options granted to the NEOs as part of their respective compensation packages for 2018 (as well as the vast majority of stock options granted in prior years) all had exercise prices above the then-current stock price and were therefore “underwater.” Accordingly, in 2018 the stock option component of our compensation program served as another example of financial consequences when performance on some fronts does not meet our high expectations.

Overview of Other Key Compensation Components and Application to 2018 Executive Compensation

While the four elements described above represent the most direct links between pay and performance, there are other significant links included in our executive compensation program. Other key components of our compensation program that link pay to performance are summarized below.

 

   

Restricted Stock Grants.    Another component of the equity portion of our executive compensation program is the grant of restricted stock to the NEOs and other key members of Management. Though not as direct a link as performance share awards, restricted stock grants also link executive compensation to our performance. Approximately one-third of the total annual equity grant value to each NEO in 2018 was comprised of restricted stock. The restrictions typically lapse in three equal installments on the first, second and third anniversaries of the date of the award. With limited exceptions, these restricted stock awards vest based on continued service during the vesting period and the actual value of the award ultimately will depend on the performance of our stock during that period leading up to vesting. The grant date fair value of all restricted stock awards to the NEOs in 2018 is set forth in the Summary Compensation Table at page 82.

 

   

Thrift Plan Matches.    Our thrift plan (the “Thrift Plan”) is a qualified retirement plan under Section 401(k) of the Internal Revenue Code. We also maintain a supplemental thrift plan that is a non-qualified retirement plan. Participation in these plans includes the NEOs, but is not limited to them. Under these plans, we match employee contributions up to a total of 5% of base salary (collectively, for both plans). Beginning in 2016, we modified the Thrift Plan such that employee contributions of up to 5% of base salary (the “Basic Contribution”) may be supplemented by us on a quarterly basis if we exceed certain net income levels for that quarter. The maximum supplemental contribution for any quarter is 100% of the Basic Contribution, based on our net income performance in that quarter. This constitutes another component of our compensation program–available to all salaried employees, including the NEOs–that is directly linked to our performance. The amounts of these supplemental contributions to the NEOs in 2018 are set forth in notes to the Summary Compensation Table at page 82.

 

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Health Savings Account Matches.    In order to help lower AK Steel’s healthcare costs and encourage employees to utilize their healthcare benefits in the most efficient manner for themselves and the Company, we offer a high deductible healthcare plan along with a health savings account to all of our salaried employees, including the NEOs. In addition to an annual fixed contribution that we make, participants are eligible to earn a variable contribution based on our financial performance, measured by net income (calculated the same as the Annual Plan). Thus, in addition to helping to better control our healthcare costs, the variable contribution aligns participating employees’ compensation with our financial performance. The total amount of fixed and variable contributions to the NEOs in 2018 are set forth in the notes to the Summary Compensation Table at page 82.

 

II.

Full Discussion and Analysis of Executive Compensation Program

Set forth below is a more detailed description of the total program, organized in a question-and-answer format, with a brief summary of key takeaways at the outset of each question-and-answer section.

Who has the direct responsibility for determining executive compensation?

Key Takeaways: The Committee has the direct responsibility for determining the compensation of all of our Executive Officers, including the NEOs, and for establishing, and periodically reviewing, our executive compensation philosophy and policies. The Committee is comprised entirely of Directors who have been determined by the Board of Directors to meet the independence standards of the Securities and Exchange Commission (“SEC”) and the New York Stock Exchange (“NYSE”), and each Committee member is an “outside” Director for purposes of Section 162(m) of the Internal Revenue Code.

Discussion: The Committee has the direct responsibility for determining the compensation of our Executive Officers and is also responsible for overseeing our policies and programs for succession planning and the development of other senior Management personnel. When the Committee deems it appropriate, it may, in its discretion, seek ratification of its determinations by the Board. The Committee also is responsible for establishing, and periodically reviewing, our executive compensation philosophy and policies and, as appropriate, will recommend changes to the Board.

Committee Membership

The Committee is comprised entirely of Directors who have been determined by the Board of Directors to meet the independence standards of the SEC and the NYSE. Each member of the Committee currently is also an “outside” Director for purposes of Section 162(m) of the Internal Revenue Code. There currently are four members of the Committee. They are Mr. Michael, Ms. Edison, Ms. Yocum and Dr. Thomson, who also serves as Non-Executive Chair of the Board.

Committee Charter and Responsibilities

The general function of the Committee is to oversee our policies and program with respect to executive compensation, succession planning and the development of senior Management personnel. The Committee operates under a written charter reviewed and approved by our full Board of Directors. The Committee’s Charter describes its specific responsibilities and is available at www.aksteel.com.

Committee Support and Use of Independent Executive Compensation Consultant

In discharging its responsibilities, the Committee is empowered to inquire into any matter that it considers appropriate to carry out its responsibilities. The Committee has the power to retain outside counsel and compensation consultants or other advisors to assist it in carrying out its responsibilities. We are required to, and do, provide adequate resources to support the Committee’s activities, including compensation of the Committee’s counsel, compensation consultant and other advisors. The

 

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Committee has the sole authority to retain, compensate, direct, oversee and terminate such counsel, compensation consultants, and other advisors hired to assist the Committee and all such advisors are ultimately accountable to the Committee.

The Committee engages an independent executive compensation consultant who reports directly to the Committee to assist it in designing the executive compensation program, as well as determining executive compensation for any given year. In connection with the 2018 executive compensation program, the Committee retained Frederic W. Cook & Co. (“FW Cook”) as its independent consultant for executive compensation matters. As appropriate, the Committee’s consultant also works with Management on behalf of the Committee, in particular with Ms. Stephanie S. Bisselberg, our Vice President, Human Resources, to develop internal compensation data and to implement compensation policies, plans and programs. The consultant, at the Committee’s request, also works with the CEO to assist him in developing his recommendations to the Committee for non-CEO Executive Officer compensation packages. The consultant provides analytical assistance and data to the Committee on the design, implementation and evaluation of our compensation program for Executive Officers. This includes providing assistance to the Committee in identifying similarly-situated companies to be included in a peer group to be used to develop competitive data. That data is used as one reference point of many in the annual determination of base salary and cash- and equity-based incentives. The consultant also periodically compiles relevant market data to supplement the peer group data. The consultant further assists the Committee in developing, evaluating and administering incentive plans, agreements addressing post-termination benefits, and other ongoing compensation-related arrangements or benefits. On request, the consultant also provides services to the Board and the Nominating and Governance Committee on Director compensation matters. Except as described above, the consultant does not provide any other services to us.

The Committee annually assesses the performance and independence of its compensation consultant. In 2018, the Committee determined that FW Cook is independent and that its engagement does not present any conflicts of interest, having considered various factors, including, without limitation, the following: (1) the amount of fees received by FW Cook from us is less than 1% of FW Cook’s total revenue; (2) FW Cook has adopted policies and procedures which appear to be reasonably and effectively designed to prevent conflicts of interest; (3) neither FW Cook nor any member of its consulting team serving us owns any of our stock or an equity derivative thereof; (4) FW Cook does not provide any services to us other than as described in this Proxy Statement in its capacity as an independent advisor with respect to Executive Officer and Director compensation; and (5) after reasonable and appropriate inquiry, we have not identified any business or personal relationships between FW Cook and any of our Executive Officers or any member of the Committee. After reviewing these and other factors. FW Cook also separately determined, and affirmed in a written statement delivered to the Chair of the Committee, that it is independent and that its engagement does not present any conflicts of interest.

What is our compensation philosophy?

Key Takeaways: Our philosophy is that the executive compensation program should strengthen the commonality of interests between Management and our stockholders by incentivizing Management to maximize long-term stockholder value, while at the same time enabling us to attract, motivate and retain employees of high caliber and ability who will drive our success.

Discussion: Consistent with those principal objectives, a significant portion of the overall compensation package for each of our NEOs and other Executive Officers includes components that link the executive’s compensation to our performance. The Committee believes that a well-designed executive compensation program includes both annual and long-term performance incentives. While annual incentive awards are an important factor in motivating executives for the short-term, the Committee believes that long-term incentives reduce the impact of volatility in business conditions on

 

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the performance-related components of the executive compensation program and also establish a stronger link between the executives’ earnings opportunity and our long-term financial performance and growth.

The Committee designs our compensation program to reward superior performance and to provide financial consequences for falling short of targeted performance. Consistent with that design objective, and the goal of attracting, motivating and retaining executives of high caliber and ability who will drive our success, the Committee attempts to establish a fair and reasonable target compensation level for each NEO and other Executive Officer that reflects not only individual performance, but also is competitive relative to the Executive Officer’s internal and external individual peers. The percentage of total compensation that is performance-based generally will increase with the level of seniority and/or responsibility of the executive. There is no set formula or policy, however, regarding the allocation between performance-based and non-performance-based compensation. Nor is there any set formula or policy for the allocation between cash and non-cash compensation. In general, the Committee aims to set annual target total direct compensation levels at or near the market median for similarly-situated executive officers at peer group and/or other comparable companies. However, individual Executive Officer positioning may be above or below the median depending on Executive Officer-specific factors, such as performance, tenure, criticality to the Company and other relevant items.

Did the Committee make any significant structural changes to the executive compensation program?

Key Takeaways: Yes. The Committee evaluated the design of our compensation program and made several significant changes aimed at further strengthening the alignment of our NEOs and other Executive Officers with the interests of our stockholders.

Discussion: During each year, the Committee periodically reviews the effectiveness and competitiveness of our executive compensation program. The Committee engages in this review with the help of FW Cook, who provides data that enables the Committee to compare our program, as well as the specific compensation packages of each of our Executive Officers, to our peers and other relevant benchmarking and market information. In addition, the Committee periodically engages in a more comprehensive “deep dive” review of the program. The Committee most recently conducted this comprehensive, deep dive review in 2017. With the assistance of FW Cook, the Committee reviewed the design of each of our incentive and retirement plans for our NEOs, other Executive Officers and other members of senior Management, evaluated them in the context of our peer group, market data and recent executive compensation trends as provided by FW Cook, and considered the views, perspectives and policies of our largest stockholders, proxy advisory firms and other significant third party stakeholders. The Committee’s deep dive review and the implementation of the changes to the compensation program emanating from that comprehensive review spanned multiple meetings of the Committee. The Committee (with the approval of or ratification from the Board, as applicable) made several significant changes to our Executive and senior Management compensation program as a result of the most recent deep dive review. The most notable of those changes, which were effective for 2018 compensation, are summarized below.

 

   

Introducing a significant stock component into the long-term incentive plan – In order to further align Management and stockholder interests in creating value over the long run, the Committee changed the mix of long-term incentive compensation for Executive Officers under the OMIP, from being cash-only awards to being denominated 30% in AK Steel stock and 70% in cash.

 

   

Locking the ERIP and replacing it with a more modest supplemental retirement plan – To strengthen Executive Officer retention and better reflect current market practice, the Committee locked the ERIP to new participants and replaced it with a new, enhanced defined contribution plan. Under the new plan, a participant begins to vest after three years of service as an Executive Officer, and we may make a contribution equal to up to 10% of the participant’s base salary and annual incentive compensation.

 

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Increased emphasis on relative TSR performance – The Committee eliminated the absolute stock price CAGR metric for performance shares and awards will be earned solely based on Relative TSR to increase the emphasis on relative performance. The Committee determined that evaluating our stock price performance on this basis was a more “apples to apples” comparison of how well we are driving stockholder value compared to companies facing similar industry conditions and against whom we compete for business, investors and employees, among other things. Additionally, the Committee recognized that the annual stock option awards already reward stock price appreciation and the absolute stock price CAGR metric was somewhat duplicative in this regard. This change became effective beginning with the performance share awards for the 2018 – 2020 performance period.

In addition, at its January 2019 meeting, the Committee evaluated our executive compensation program and assessed additional changes to the program aimed at increasing Management’s alignment with our stockholders’ interests. The Committee implemented two significant changes to the program in 2019:

 

   

Further bolstering the stock component of the long-term incentive plan – The Committee increased the equity component for Executive Officers’ long-term incentive compensation to 50% denominated in AK Steel stock and 50% denominated in cash.

 

   

Dramatically reducing the 2019 equity awards to Executive Officers – The Committee reduced the 2019 equity grant values (including the equity component of the Long-Term Incentive Plan) to all Executive Officers, including the NEOs, by 30% to 35%.

Finally, although not a change to the compensation program’s design per se, the Committee elected not to increase the 2019 base salaries or target cash compensation for most NEOs, including the CEO, the President and COO, and the CFO.

Did the Committee make any changes to the specific performance metrics under the Annual Plan?

Key Takeaways: Yes. In January 2018, the Committee (i) added “slab loss” as a metric to the quality component of the Annual Plan to encourage better quality performance and lower costs, and (ii) added a sustainability component to the Annual Plan.

Discussion: The Committee works with Management to evaluate regularly potential areas for increasing operational efficiency and reducing the costs associated with producing our high-quality steel products. As a result of this process, in January 2018, the Committee added “slab loss” as a metric under the quality component because it was determined to be an area in which potentially millions of dollars of improvement could be made, representing an opportunity to target reduced costs and improve financial results. In general, the slab loss metric tracks the effectiveness of our operations in terms of the percentage of steel slabs we produce that are outside of the requisite quality parameters. Thus, the lower the amount of steel slabs that we cannot use because they do not meet the necessary specifications, the more efficient our operations, the lower our costs, and the more steel we can sell to our customers, each of which positively contributes to our financial results.

As highlighted above in the “Sustainability and Corporate Responsibility” section of this Proxy Statement, our Board and its Corporate Sustainability Committee are committed to ensuring that we operate in a sustainable manner and are a responsible corporate citizen. In January 2018, in order to emphasize the importance of environmental responsibility and to continue to drive improved sustainability performance, our Board of Directors, at the recommendation of the Committee, implemented a sustainability performance component into our 2018 Annual Plan. The Board and the Committee assessed a variety of potential performance categories, including those areas most ripe for improvement, before selecting air permit deviation events as the applicable component. An air permit deviation event occurs when an event at our operations results in noncompliance under the Title V air permits that govern our facilities. Our plants’ compliance with their air permits, including emissions from our operations, is a key area of emphasis for environmental performance and one in which we strive for continuous improvement.

 

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The Committee analyzed and evaluated these changes to Annual Plan metrics with the assistance of Management, with a focus on ensuring that they incentivize the right actions by employees to drive long-term stockholder value.

Do we reach out to stockholders to solicit their views on our executive compensation program?

Key Takeaways: Yes. Twice per year, beyond our regular, ongoing dialogue with our stockholders led by our Investor Relations, we engage in significant shareholder outreach campaigns. The principal purposes of these campaigns, in which we contact our largest 30 stockholders, are to address any issues that they would like to discuss, listen to their suggestions and recommendations, and engage in a dialogue on key subjects, such as executive compensation, corporate governance practices and ESG initiatives. We share the stockholders’ perspectives and feedback directly with the Management Development and Compensation Committee and the Nominating and Governance Committee.

Discussion: In addition to our regular, ongoing stockholder engagement efforts throughout the year, we engage in two targeted outreach campaigns during the year. We approach these discussions principally as an opportunity to hear what is on the minds of our largest stockholders and to solicit their feedback and suggestions on key matters of interest. The first of these outreach campaigns occurs in the Spring, in the period leading up to our Annual Meeting, and the second occurs in the Fall/Winter, when fewer companies hold annual meetings and stockholders have more time to engage in a broader and deeper way. Accordingly, in early 2018, prior to the 2018 Annual Meeting, we invited more than 30 of our largest stockholders—collectively owning approximately 60% of then-outstanding common stock—to engage in dialogue with Executive Management, particularly as to our executive compensation program and corporate governance. As part of this invitation, we offered each stockholder the opportunity to speak directly with Mr. Michael, the Chair of the Committee, to discuss and provide feedback on our executive compensation program. Our second targeted outreach campaign was specifically scheduled for later in 2018, during the “off-season” for public company annual meetings. As with the earlier outreach, we invited about 30 of our largest stockholders—collectively owning approximately 58% of our then-outstanding stock—to engage on any topics of interest to them, such as corporate governance and our sustainability and ESG (environmental, social and governance) programs. During these two engagement campaigns we had extended discussions with stockholders who collectively owned approximately 21% of our then-outstanding common stock, including several of our top stockholders. Following each of these engagement campaigns, we updated our Management Development and Compensation Committee, Nominating and Governance Committee and Board on these discussions and shared direct feedback and suggestions from stockholders.

During the past two years, several of the significant design changes that the Committee has implemented to the compensation program have been made after consideration of and reflection upon feedback from our largest shareholders gleaned during our bi-annual outreach campaigns. For example, during our 2017 campaigns, shareholders suggested that we consider utilizing other and/or additional categories of performance-based goals under our incentive plans and to evaluate whether ESG principles were being considered in a strategic way by the Company, the Board and Executive Management. The Committee took this feedback into account when, in January 2018, it elected to incorporate a sustainability component into our 2018 Annual Plan. Similarly, after taking shareholder feedback into consideration, during the past two years the Committee has continued to implement changes to our compensation program to further align Management with the stockholders by enhancing the weighting of performance-based equity. Thus, in January 2018, the Committee changed the Long-Term Plan from being 100% cash denominated to 30% stock denominated and 70% cash denominated, and then increased the equity weighting to 50% in January 2019.

For additional information regarding the Committee consideration of the 2018 “say on pay” vote, please see the discussion on page 79.

 

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What specific governance policies and practices do we have that impact executive compensation?

Key Takeaways: We believe that we observe all of the principal best practices for similarly situated companies, including a policy against re-pricing or replacing underwater options (which is also codified in our Stock Plan), a compensation clawback policy, a policy requiring stockholder approval of certain severance agreements with senior executives, stock retention guidelines for Executive Officers, and a policy prohibiting insider trading, hedging transactions and pledging of securities.

Discussion: Set forth below is a brief description of these principal policies that impact executive compensation.

Policy against Re-Pricing or Replacing Underwater Options

We have long had a practice of not re-pricing or replacing stock options when our stock is at a price below which such options are exercisable. We first formalized this practice into a policy in January 2012. The policy was incorporated at that time in our Corporate Governance Guidelines. Those guidelines are available on our website at www.aksteel.com. Our stockholders have approved our Stock Plan, which also explicitly prohibits, in the absence of stockholder approval, the re-pricing or replacing of outstanding options.

Compensation Clawback Policy

The Board has adopted a compensation clawback policy, which provides that we may recoup cash and equity of performance-based incentive compensation from officers covered by the policy if the Board determines that the officer has engaged in knowing or intentional fraudulent or illegal conduct that resulted in the achievement of financial results or the satisfaction of performance metrics that increased the amount of such compensation.

Stockholder Approval of Certain Severance Agreements with Senior Executives

The Board also has adopted a policy concerning stockholder approval of certain severance agreements with our senior executives, including our NEOs. That policy provides that the Board should seek stockholder approval or ratification of severance agreements with our senior executives if such agreements require payment of benefits attributable to severance in an amount exceeding 2.99 times the sum of the senior executive’s annual base salary plus annual and long-term incentive awards payable for the then-current calendar year. For purposes of this policy, the term “severance agreement” means an employment agreement, retirement agreement or change-of-control agreement which contains a provision for payment of benefits upon severance of employment with us, as well as renewals, modifications or extensions of such agreements. The term “senior executive” means the CEO, President and COO, CFO, principal accounting officer and any of our Vice Presidents. The term “benefits” means lump-sum cash payments (including cash payments in lieu of medical benefits) and the estimated present value of future periodic cash payments to be paid to a senior executive in excess of what he or she otherwise would be entitled to receive under the terms of any qualified or non-qualified pension or employee benefit plan.

Stock Retention Guidelines for Executive Officers

In January 2017, the Board, at the recommendation of the Committee, adopted enhanced stock retention guidelines for Executive Officers to replace the prior guidelines. The adoption of the stock retention guidelines was principally motivated by the desire to implement a more modern design that provides some additional flexibility to the Executive Officers while maintaining the linkage between their interests and those of stockholders by requiring a minimum level of stock ownership. The stock retention guidelines require each Executive Officer to retain 50% of the “Net Profit Shares” (as defined below) resulting from stock option exercises and/or vesting of other stock-based awards until they

 

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reach their required stock ownership level. “Net Profit Shares” are the shares remaining after payment of the option exercise price and taxes owed upon exercise of stock options, vesting of restricted stock, and vesting of performance shares. Each Executive Officer’s compliance with the Policy is determined as of December 31 of each year by comparing (i) the required stock ownership level, which is equal to the Executive Officer’s base salary multiple as of December 31, multiplied by the Officer’s annual base salary as of December 31; and (ii) the Executive Officer’s year-end stock ownership level, which is the stock they owned as of December 31, multiplied by our average month-end closing stock price for the twelve months of that year. In October 2017, the Committee increased our CFO’s multiple from one times his annual salary to one-and-one-half his annual salary to better align with market practice for similarly-situated companies. The stock ownership levels, expressed as a multiple of annual base salary, are as follows:

 

 

Position

 

  

 

 Stock Ownership Level 

 

CEO

 

  

3x

 

 

President and COO

 

  

 

2x

 

 

CFO

 

  

 

1.5x

 

 

Other Executive Officers

 

 

  

 

1x

 

 

The policy requires Management to provide annual updates to the Committee on each Executive Officer’s progress toward achievement of and compliance with the retention ratio. Currently, each of the NEOs is in compliance with the stock retention guidelines.

Policy Prohibiting Insider Trading, Hedging Transactions and Pledging of Securities

We have long had a formal policy that prohibits all Directors and employees, including the Executive Officers, who have material, non-public information about us from trading in our securities. The policy also explicitly prohibits all employees from engaging in hedging or monetization transactions, pledging our securities as collateral for loans, holding our securities in margin accounts and engaging in short sales. In March 2018, we revised our Insider Trading and Anti-Hedging Policy to expressly include knowledge of a major cybersecurity event as a potential item of material non-public information that would preclude trading in AK Steel securities.

How does the Committee determine executive compensation?

Key Takeaways: Each year, the Committee’s independent executive compensation consultant develops competitive compensation data based upon publicly available information from our peer group of companies (which are listed on page 60), as well as other survey data. The Committee uses this competitive data to assess the reasonableness of any compensation package the Committee is considering for an Executive Officer. The CEO works with the Chair of the Committee and the Committee’s independent compensation consultant to develop recommendations to the Committee for the Executive Officers other than himself. With respect to the CEO’s compensation, the Chair of the Committee works with the compensation consultant to develop recommendations to the Committee. The Committee, after discussing the matter with the executive compensation consultant, then develops and approves the CEO’s compensation package. The CEO is not involved in that process.

 

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Discussion:

Use of Competitive Data in the Compensation Determination Process

Each year, the Committee’s executive compensation consultant develops competitive compensation data based upon publicly available information from a peer group of comparable companies, as well as other general industry survey data. The Committee relies upon and considers this information as a factor in its determination, and although the Committee generally targets the median compensation for its NEOs and Executive Officers with individuals with similar roles and responsibilities at peer group companies, it does not have a policy or practice of utilizing a particular market compensation percentile as a benchmark for purposes of determining compensation levels for the various components of executive pay. The Committee principally uses this competitive data as one factor for assessing the reasonableness of any compensation package the Committee is considering for an Executive Officer. In addition, this peer group data enables the Committee to better understand what competitors or other potential employers may pay to entice away an existing Executive Officer and what we must pay to attract and retain new Executive Officers, thereby assisting the Committee with its goal of attracting and retaining executives of high caliber to drive strong company performance.

Peer Companies

The competitive data used by the Committee include compensation data from a peer group of industrial companies with sales, size and scope reasonably comparable to us, as well as other large publicly-owned, United States-based companies in the steel industry. Among other factors, the members of this peer group are selected because we directly or indirectly compete with them for employees, business, capital and/or investors, whether as a result of the peer company’s status as an industry competitor or as a manufacturing company with a similar range of market capitalization, geographic location, manner of operations, and/or other relevant characteristics.

The Committee periodically reviews the peer group to evaluate whether it remains reasonable and appropriate. The Committee worked with FW Cook to formulate the current peer group, which the Board subsequently approved. The Committee periodically evaluates our peer group in detail, with the assistance of FW Cook. The Committee used this peer group in January 2018 for purposes of determining 2018 target compensation levels. It consists of the following companies:

 

•  Alcoa Inc.

 

•  Nucor Corporation

•  Allegheny Technologies Incorporated

 

•  Reliance Steel & Aluminum Co.

•  Carpenter Technologies Inc.

 

•  Schnitzer Steel Industries, Inc.

•  Cleveland-Cliffs Inc.

 

•  Steel Dynamics, Inc.

•  Commercial Metals Company

 

•  The Timken Company

•  General Cable Corporation

 

•  Trinity Industries Inc.

•  Huntsman Corporation

 

•  United States Steel Corporation

•  Meritor Inc.

 

•  Worthington Industries, Inc.

Use of Tally Sheets

The Committee utilizes a presentation similar to tally sheets to review the amounts payable under each element of an NEO’s compensation, as well as the aggregate value of such compensation, in the event of a circumstance that would trigger payment of post-termination compensation in connection with a change-of-control of the company. This presentation is prepared by our executive compensation consultant, with the assistance of our independent outside actuary.

 

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Key Factors Considered by the Committee During the 2018 Compensation Process

As part of its normal deliberative process for the compensation of each of the Executive Officers, including the CEO and other NEOs, the Committee considered a number of factors in establishing 2018 base salaries, selecting performance-based incentives, and determining target total direct compensation. Some of the principal factors evaluated by the Committee were the following:

 

   

a report prepared by FW Cook that, among other things, analyzed competitive peer group and market compensation data to assess executive target total direct compensation levels and annual share usage / burn rate, total overhang and aggregate costs related to long-term incentive awards;

 

   

the need to retain and motivate Executive Management to maximize long-term shareholder value, deliver improved financial results and compete effectively;

 

   

the Board’s evaluation of each Executive Officer’s individual experience and performance and his or her relative contribution to the Company’s performance;

 

   

the performance of our common stock and other publicly-traded securities in recent periods;

 

   

our financial performance in 2017, projected financial performance in 2018 and projections of financial performance over the next several years;

 

   

our financial, quality, safety and environmental performance in 2017 and the trends associated with these performance metrics in recent years;

 

   

the highly competitive nature of the steel industry;

 

   

quantitative and qualitative data as to the target total direct compensation and mix of compensation components for individuals with the same or similar roles and responsibilities at peer group companies and other similarly situated companies;

 

   

the level of compensation of each Executive Officer in relation to the others;

 

   

the extent to which performance goals incentivize appropriate conduct and do not encourage inappropriate or excessive risk that would not be in our or our stakeholders’ best interests; and

 

   

executive compensation best practices for public companies of a similar size, business and/or nature, including peer group companies.

For a summary of how the Committee considered our recent past and future projected business performance in making executive compensation determinations for 2018 compensation packages, please see the discussion beginning on page 45.

Management’s Role in the Compensation Process

After consulting with the Committee’s executive compensation consultant, Mr. Newport made recommendations to the Committee regarding the 2018 annual compensation packages for all of the Executive Officers. The Committee discussed Mr. Newport’s recommendations with him and the Committee’s executive compensation consultant before it made the final determination of the non-CEO executive compensation packages. Mr. Newport was not involved in the process for determining any component of his own compensation package.

Other than Mr. Newport, the only member of Management who provides recommendations to the Committee regarding the compensation program is Ms. Bisselberg, our Vice President, Human Resources. In this role, each year she makes recommendations to the Committee on the goals to be used for purposes of determining performance awards in the next performance cycle for our annual and long-term incentive plans and for performance shares under the Stock Plan. The recommendations on such goals principally take into consideration Management’s performance

 

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against the goals of the prior performance cycle, consultation with other senior Management personnel concerning our anticipated performance in the next performance cycle on those goals, an evaluation of what would be demanding, but attainable, performance levels for each specific goal, and consultation with the Committee’s executive compensation consultant. Ms. Bisselberg further evaluates and makes recommendations to the Committee on the design and implementation of the various incentive plans, retirement plans, and other ongoing compensation-related arrangements and benefits for the NEOs and other Executive Officers.

Committee Conclusion and Actions on 2018 Compensation Packages

Following its compensation analysis process and its evaluation of the factors set forth above and other relevant considerations, the Committee designed 2018 compensation packages for each of the NEOs and our other Executive Officers that were consistent with our pay-for-performance compensation philosophy and were determined to be reasonable, competitive and appropriate, both individually and taken as a whole.

Ultimately, the Committee’s decisions on 2018 compensation packages for the NEOs and other Executive Officers were primarily founded upon the Committee’s recognition of the level of performance by each Executive Officer and the Committee’s confidence that the compensation packages provide proper incentive for these Executive Officers to continue to focus on serving our and our stockholders’ best interests while remaining employed with us. The Committee further concluded that these packages provided appropriate incentives to motivate our Executive Management team to work diligently and collaboratively, to think differently and creatively, and to execute our strategy in order to maximize long-term value for our stockholders through strong financial performance.

The Committee approved the 2018 compensation packages for the NEOs, which are reflected in the Summary Compensation Table beginning on page 82.

What actions did the Committee take in 2018 regarding the key elements of our executive compensation program for the NEOs and what were the principal reasons for those actions?

Key Takeaways: In determining the NEOs’ compensation packages for 2018, throughout the process the Committee’s goal was to implement its pay-for-performance philosophy that a compensation program should strengthen the commonality of interests between Management and our stockholders, while at the same time enabling us to attract, motivate and retain executives of high caliber and ability who will drive our success.

Discussion:

2018 Target Total Direct Compensation Packages for the CEO and Other NEOs

The charts below provide the various components of target total direct compensation for 2018 for the CEO and the other NEOs. The components of the CEO’s and other NEOs’ respective target total direct compensation packages that are classified as performance-based compensation include the following: (i) target annual incentive payments for 2018; (ii) target long-term incentive payments for the three-year performance period from 2018 to 2020; (iii) the grant date fair value of stock option awards made in 2018; and (iv) the grant date fair value of performance share awards for the three-year performance period from 2018 to 2020. The components of the CEO’s and other NEOs’ respective compensation packages that are not classified as performance-based compensation include the following: (1) base salary for 2018; and (2) the grant date value of restricted stock awards made in

 

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2018. These charts demonstrate that (i) 69% of the CEO’s target total direct compensation was performance-based and that 76% of the CEO’s 2018 long-term incentive awards was performance-based; and (ii) 64% of the other NEOs’ average target total direct compensation was performance-based and that 81% of the other NEOs’ average 2018 long-term incentive awards were performance-based.

 

LOGO

   LOGO

 

LOGO

   LOGO

The 2018 target total direct compensation values used for the above chart are as follows:

 

     CEO      Other NEOs  

2018 Target Total Direct
Compensation Element

   Value
(in thousands)
       % of
TDC
       % of
LTI
     Aggregate
Value
(in thousands)
     % of
Aggregate
TDC
     % of
Aggregate
LTI
 

Base Salary

   $ 950          15.3        N/A      $ 1,950        26.2      N/A  

Target Bonus

     1,188          19.0        N/A        1,621        21.7      N/A  

LTPP

     1,200          19.2        29.2      1,671        22.4      43.0

Stock Options

     969          15.5        23.6      740        9.9      19.0

Performance Shares

     969          15.5        23.6      740        9.9      19.0

Restricted Stock

     969          15.5        23.6      740        9.9      19.0

Target Total Direct Compensation

   $ 6,245          100.0        100.0    $ 7,462        100.0      100.0

 

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Non-Performance Based Cash Compensation

Base Salary

The salary level for an Executive Officer is assigned initially based upon, among other factors, experience, expertise, job responsibilities, and peer group and market data provided by the Committee’s executive compensation consultant. The individual performance of each Executive Officer was reviewed by the Committee with Mr. Newport in executive session without other members of Management present. The Committee also reviewed the base salary levels of Mr. Newport, the other NEOs and other Executive Officers for internal consistency and equity relative to each other. The principal factors considered by the Committee in determining whether to increase, maintain, or decrease an annual base salary for an NEO are individual performance, our business performance, changes in job responsibility, and competitive market compensation data and trends, including at our peer group companies. Although the Committee generally targets the median level for compensation for individuals with similar roles and responsibilities at peer group companies, the Committee does not rely on any specific formula, nor does it assign specific weights to the various factors when determining base salaries. Strong individual performance and strong performance by our business would generally result in above-market increases. Below-market increases, no increases, or even decreases may occur in years when either individual performance or our business performance has been below expectations. The amounts of the base salaries for the NEOs are reflected in the Summary Compensation Table for 2018 at page 82. Most NEO base salaries were held flat in January 2018, including the base salaries of the CEO and President and COO. With respect to 2019 base salaries, the Committee again determined not to increase base salaries for most NEOs, including the CEO, the President and COO, and the CFO.

Performance Based Compensation – Cash and Equity

Annual Incentive Awards – Cash

We provide annual cash performance awards to our employees, including our NEOs, under our Annual Plan. This component of an NEO’s compensation is intended to motivate the NEO to focus on performance-based goals that directly impact stockholders through annual financial and non-financial objectives that will drive our long-term value. Under the terms of the Annual Plan, a participant can earn a performance award based upon our annual performance against goals established for performance at a threshold, target and maximum level. The four performance metrics used are financial, quality, safety and sustainability. Under the terms of the Annual Plan, the Committee weights each performance factor as a percentage of the whole.

For 2018, Mr. Newport’s target level for a performance award under the Annual Plan was an amount equal to 125% of base salary, providing him significant incentive to continue to improve the business. For the other NEOs, depending upon their title and position, a performance award under the Annual Plan at the target level for 2018 would be paid in an amount equal to between 65% and 100% of base salary. Maximum awards were set at two times the target amount. Awards that are earned between the threshold and the target level are determined by a straight-line interpolation between those two levels, starting from a base of zero at the threshold level. A maximum award can only be earned through financial performance. Thus, while a target award is weighted among the performance components as 50% financial, 25% quality, 20% safety and 5% sustainability, any award above target is earned solely through financial performance. For example, as further discussed below, in 2018 the actual weighting of the Annual Plan payment earned at 166% of target by the NEOs was allocated among the four performance components as follows:

 

   

Financial: 127%

 

   

Quality: 24%

 

   

Safety: 10%

 

   

Sustainability: 5%

 

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For the 2018 financial performance component of the Annual Plan, net income was the metric utilized to measure performance. For purposes of calculating net income under the Annual Plan, the Committee may exclude, in accordance with the terms of the plan, special, unusual and extraordinary items. The Committee selected net income as the metric because it is a widely recognized and accepted measure of a company’s financial performance and the Committee believes it aligns the interests of Management with our stockholders, as net income is typically perceived as a key driver of stock performance. The net income threshold goal typically is set at a level that would represent a minimum acceptable performance in the context of the business conditions and other challenges and opportunities that we may face or from which we may benefit. The target goal typically is set at a level that would represent performance that is demanding, but still reasonably attainable. The maximum goal is set at a level which would represent very strong performance under the circumstances foreseeable to the Committee at the time the goals are established.

At its March 2018 meeting, the Committee carefully evaluated a number of factors in selecting maximum, target and threshold net income performance goals for the 2018 Annual Plan of $235 million, $155 million and $75 million, respectively. Each of these annual financial performance goals represented significant increases over the prior year’s financial objectives, with the target level representing a 72% increase. The target net income performance goal for 2018 was also set at a level that was approximately 50% higher than our actual net income for 2017. As the Committee does each year, it determined the target performance goal primarily with reference to our annual Business Plan for 2018. Our 2018 Business Plan (like prior years’ annual business plans) was formulated through a rigorous, months’ long process that includes comprehensive “bottom up” and “top down” evaluations. As such, the 2018 Business Plan reflected a variety of significant market-related, macroeconomic and company-specific assumptions. Some of the key assumptions on which the 2018 Business Plan was founded included projections related to estimated steel prices, including the potential impacts of the then-pending Section 232 investigation into foreign steel imports, costs for raw materials and steelmaking supplies, the performance of our downstream operations at AK Tube and Precision Partners, and an anticipated softening of our core automotive market. In addition, the 2018 Annual Plan target included almost $60 million of unidentified “stretch” that Management would be required to overcome to meet the goal set by the Committee. Our Finance Committee also oversees the annual Business Plan process, adding yet another layer of review and rigor, before it is ultimately evaluated and approved by the Board. The Management Development and Compensation Committee, after reviewing the 2018 Business Plan and weighing a significant number of uncertainties and assumptions reflected in that Plan, determined that the target level of performance was challenging but reasonable under the specific circumstances.

In 2018, we achieved net income of $216.8 million (excluding special, unusual and extraordinary items approved by the Committee4), which represented performance above the target level but below the maximum level. As a result, the financial portion of the Annual Plan was earned at 166% of target. The year 2018 represented our best annual financial performance in the past decade. We overcame unforeseeable operational challenges from unplanned steelmaking outages, as we benefitted from continued excellence in servicing our core automotive market and from higher steel prices principally as a result of the unanticipated tailwinds of Section 232 steel tariffs.

 

4 

For 2018, we reported net income of $186.0 million. Consistent with the terms of the Annual Plan, the Committee discussed in detail and determined to adjust our reported net income for 2018 for certain special, unusual and extraordinary items. From the reported net income, the Committee deducted/debited a $5.0 million benefit from the 2017 Tax Cuts and Jobs Act related to our deferred tax assets, and added/credited $22.0 million of gains on settled iron ore derivatives and $14.5 million pension settlement charge resulting from the completion of a successful de-risking pension annuity transaction. These adjustments resulted in 2018 net income of $216.8 million for purposes of the Annual Plan. After closely evaluating these items, the Committee classified them as special, unusual and/or extraordinary because they involved actions that the Committee believe create long term value that, therefore, should not be discouraged by including their impact in Annual Plan performance calculations during the relevant period.

 

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For the quality performance factor, as mentioned above, in January 2018 the Committee modestly changed the quality objective by adding “slab loss” as another metric. In general, slab loss tracks the effectiveness of our operations in terms of the percentage of steel slabs that we produce that fail to meet the requisite quality parameters. Thus, the slab loss metric was added to the quality component because it was determined to be an area in which potentially millions of dollars of improvement could be made, representing an opportunity to target reduced costs and improve financial results. As such, in 2018 the quality component of the Annual Plan was comprised of five metrics: internal rejections, internal retreats, process loss, slab loss and external customer claims. In addition to slab loss, the Committee selected these other metrics because they also are commonly used in the steel industry to measure both internal and external quality performance. Our intense focus on quality performance has taken on greater importance in recent years, as our sales to the automotive industry—which is known for requiring nearly flawless quality performance—have grown, both in absolute terms and as a strategic goal for expanding margins. The below table illustrates our growth in net sales to the highly demanding, quality-focused automotive industry.

 

 

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Quality performance has also continued to grow in importance as we have increased production of more technically challenging advanced high strength steel products for automotive customers and other applications. Although our leading edge, innovative steels in this category are an area of targeted strategic growth, these products are very difficult to manufacture, particularly in light of the ongoing requirement to meet automotive customers’ high quality specifications. Our best-in-class quality has been and will continue to be critical to our efforts to distinguish our innovative products from competitors and to capture a greater share of higher margin business, thereby making it a key area in which to incentivize our employees’ performance.

For the quality component of the Annual Plan, in January 2018 the Committee established a target level goal of no more than 0.545% for the internal rejection rate, 1.070% for the internal retreat rate, 0.272% for the process loss rate, 3.358% for the slab loss rate, and 0.178% for the customer claim rate. Each of these metrics was set taking into account our projected product mix for 2018. Therefore, although not every quality target in 2018 was lower (i.e., better) than the level set by the Committee for the prior year, each target goal required continuous improvement across our operations in light of a more difficult-to-make mix of products anticipated for 2018, and thus set a higher bar for performance. The threshold goals for each of those metrics were set at 125% of the target goals (for both the quality and safety annual performance objectives, a higher number reflects less successful performance). The Committee selected these quality goals because they represented challenging, but achievable goals that, if attained, would reflect a significant improvement and continue our recognized industry-leading quality performance.

 

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In 2018, we performed relatively well across our operations in terms of quality. We delivered better than target level performance goals for internal retreats, slab loss and external customer claims. However, reflecting the challenging nature of the objectives, we met threshold performance but fell short of target level performance for internal rejections and process loss.

For the 2018 safety performance objective, the Committee again selected Days Away, Restricted and Transfer (“DART”) cases as the applicable metric. A DART case occurs when an employee misses work or is reassigned or transferred from normal work duties due to a workplace injury. The Committee selected this metric because the safety of our employees continues to be our highest priority and DART cases are a standard, objective metric reported to a federal government agency. In addition, DART cases or variations thereof (such as “lost time injuries,” which is a narrower category and does not capture as many safety issues as DART) are commonly used in the steel industry as a measure of safety performance.

At its January 2018 meeting, the Committee established a target level goal of no more than 22 DART cases on a company-wide basis, and a threshold level goal equal to 125% of that target goal. (As with the quality component, the threshold goal in this instance is higher than the target goal because it reflects more injuries and therefore less successful performance.) The Committee selected a difficult but achievable goal that would require improvement from the prior year’s performance and was expected to represent industry-leading performance. For 2018, we fell short of our target objective, as we experienced 25 DART cases. Thus, for the year we performed better than the threshold level but did not meet target level performance for safety under the Annual Plan.

For the 2018 sustainability component, the Committee selected air permit deviation events as the applicable metric. An air permit deviation event occurs when an event at our operations results in noncompliance under the Title V air permits that govern our facilities. As discussed above, the Committee chose air permit deviation events in order to emphasize the importance of environmental responsibility and to continue to drive improved performance through our plants’ compliance with their air permits, which is a key area of emphasis for our sustainability program. At its January 2018 meeting, the Committee established a target level goal of no more than 37 air permit deviation events, and a threshold level goal equal to 125% of that target goal. Similar to the approach taken by the Committee for the annual quality and safety objectives, the Committee selected a goal that was possible to achieve but would require improvement from the prior year’s performance. For 2018, we met our target level performance by experiencing less than 30 air permit deviation events. As such, the sustainability portion of the Annual Plan was earned in full.

In January 2019, the Committee approved the payment of performance awards at a level of 166% of the target (83% of maximum) award for the 2018 performance period to the participants in the Annual Plan. The amount of the Annual Plan performance awards to each of the NEOs for 2018 is included in the Summary Compensation Table for 2018 beginning on page 82.

Long-Term Incentive Awards – Cash and Equity

We also provide long-term performance awards to our designated employees, including our NEOs, pursuant to our Long-Term Plan. The fundamental purposes of our Long-Term Plan are to:

 

   

align the interests of Management more closely with the interests of the stockholders in order to maximize long-term stockholder value;

 

   

link a significant portion of Management’s total compensation to our performance;

 

   

increase the focus of Management on our long-term performance by establishing performance goals that support long-term strategies; and,

 

   

assist us in recruiting, retaining and motivating a highly talented group of managers who will successfully deliver long-term benefit to our stockholders.

 

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Under the terms of the Long-Term Plan, a participant can earn a performance award based upon performance against a goal established by the Committee at the start of the three-year performance period. For 2018, the Committee used cumulative adjusted EBITDA (excluding, in accordance with the terms of the plan, special, unusual and extraordinary items3) as the performance metric for the Long-Term Plan. The Committee selected this metric because the Committee believes it provides a strong incentive for Management to achieve our objective of sustainable profitability and increase stockholder value. Accordingly, the Committee believes the use of this metric will more closely align the interests of Management with the interests of our stockholders over the long term.

Pursuant to the terms of the Long-Term Plan, in the first quarter of each three-year performance period the Committee establishes threshold, target and maximum goals for cumulative adjusted EBITDA to be achieved in the performance period. In determining the Long-Term Plan goals, the Committee attempts to establish a target goal that will be challenging to achieve and that is not likely to be satisfied in every three-year performance period. In fact, as illustrated in the table on page 44, over the past five-year period (2014 – 2018), the Long-Term Plan payout has averaged only 72% of target (this average payout drops to 56% of target over the prior ten-year period). As with the Annual Plan goals, the threshold goal under the Long-Term goal is set at a level that represents the minimum acceptable performance and the maximum goal is set at a level that represents very strong performance under the circumstances. The threshold goal must be met before any payout is made.

Mr. Newport’s target level for a performance award under the Long-Term Plan was an amount equal to 120% of his base salary. For the other NEOs, and depending upon the NEO’s title and position, a performance award under the Long-Term Plan at the target level for 2018 would be paid in an amount equal to between 65% and 100% of base salary. If the threshold performance goal is achieved, then each participant would receive a performance award equal to one half of the target amount and maximum performance would earn twice the payout of target. There is a straight-line interpolation of the payout for achievement of cumulative EBITDA between the threshold, target and maximum payout goals. For the 2016-2018 performance period, payouts earned were paid in cash. As further discussed below, however, the Committee has since changed the Long-Term Plan to be denominated and settled 50% in cash and 50% in stock.

For the three-year period ending December 31, 2018, the Committee established at its January 2016 meeting cumulative adjusted EBITDA goals of $1.5 billion to earn payment at the maximum level, $1.25 billion to earn payment at the target level and $1.0 billion as the threshold to earn any incentive payment. The $1.25 billion target set by the Committee for the 2016 – 2018 period was an ambitious goal, as it required performance that was approximately 35% higher than the $928 million of cumulative adjusted EBITDA that we generated in the prior three-year period (2013 – 2015). For the three-year period ending in 2018, we earned cumulative adjusted EBITDA of $1.49 billion (excluding, in accordance with the terms of the plan, special, extraordinary and unusual items5). As a result, participants in the Long-Term Plan, including the NEOs, earned an incentive payment in an amount equal to 196% of the target award for the 2016 – 2018 performance period. The notes to the Summary Compensation Table beginning on page 82 include the amounts paid to the NEOs under the Long-Term Plan.

 

5 

Consistent with the terms of the Long-Term Plan, the Committee discussed in detail and determined to adjust our EBITDA for the 2016 – 2018 performance period for items classified as special, unusual and/or extraordinary. From our three-year cumulative adjusted EBITDA total of $1.459 billion (comprised of annual EBITDA for 2016, 2017 and 2018, as reported in our Annual Report on Form 10-K for the respective year), the Committee (i) with respect to 2016, deducted/debited $46 million for unrealized mark-to-market gains on iron ore derivatives; (ii) with respect to 2017, deducted/debited $31 million for unrealized mark-to-market gains on iron ore derivatives and added/credited $6 million of acquisition costs associated with our purchase of Precision Partners, $21 million of costs incurred in connection with our refinancing of senior notes, and $36 million of gains on settled iron ore derivatives; (iii) with respect to 2018, added/credited $22 million of gains on settled iron ore derivatives. These adjustments resulted in cumulative three-year adjusted EBITDA of $1.49 billion for the 2016 – 2018 period for purposes of the Long-Term Plan. After closely evaluating these items, the Committee classified them as special, unusual and/or extraordinary because they involved actions that the Committee believe create long term value that, therefore, should not be discouraged by including their impact in Long-Term Plan performance calculation for the relevant period.

 

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In January 2018, as part of the Committee’s ongoing evaluation of our compensation program and goal of further aligning Management’s long-term interests with those of our stockholders, the Committee decided to introduce a significant stock component into the Long-Term Plan. Thus, for the 2018 – 2020 performance period, the Committee changed the mix of long-term incentive compensation for Executive Officers under the OMIP from being cash-only awards to being 30% denominated in AK Steel stock and 70% denominated in cash.

Moreover, in January 2019, the Committee continued to consider the level to which Management is incentivized to maximize long term value for stockholders. The Committee sought to take additional, proactive measures in order to ensure that Management has the opportunity to be rewarded when the price of our shares increases, while suffering financial consequences if the price falls. Thus, at its January 2019 meeting, the Committee further bolstered the stock component of the Long-Term Plan, as Long-Term Plan awards will be denominated 50% in AK Steel stock and 50% in cash for the 2019 – 2021 performance period.

2018 Equity Grants to NEOs and Actions Taken in 2019

The Committee engaged FW Cook to provide assistance in determining appropriate 2018 equity awards to the NEOs and other Executive Officers. In January 2018, FW Cook developed and provided to the Committee competitive compensation data based upon publicly available information from our peer group, as well as other market data. The Committee considered this information as a factor in its determination of equity grants, but it did not utilize a particular compensation percentile as a benchmark for purposes of determining such grants. Rather, this competitive data was used by the Committee to help it assess the reasonableness of the grant awards under consideration by the Committee for each NEO and the other Executive Officers.

The total value of shares of the January 2018 equity grants to the NEOs, as of the grant date, was allocated approximately as follows: one-third stock options, one-third restricted stock, and one-third performance shares at target. For determining the equity component of the NEOs’ and other Executive Officers’ 2018 compensation package, the Committee used the market price of the stock on the day of its January 2018 meeting to determine the number of stock options, restricted shares and performance shares to grant.

In January 2019, the Committee evaluated its approach to equity grants to the NEOs and Executive Officers, principally driven by dissatisfaction among members of the Board and the Executive Officers with regard to the performance of our common stock in 2018. After discussion among the members of the Committee, the Committee determined to materially decrease the amount of equity granted to the NEOs and other Executive Officers as part of their respective 2019 compensation packages. As such, at its January 2019 meeting, the Committee determined the number of stock options, restricted shares and performance shares for each NEO and other Executive Officer by dividing the intended grant value by the accounting cost of each award assuming a $4.00 stock price—which was substantially higher than the closing stock price of $2.62 on the January 23, 2019 grant date—representing a 30-35% reduction in the value of equity granted relative to the typical intended grant value. While this action was undertaken principally as a response to our stock price performance in 2018, the Committee also adopted this approach (1) to maintain reasonable share usage and overhang levels, (2) to avoid rapid depletion of the share reserve in our Stock Plan, and (3) because the Committee and Board believed that the then-current stock price understated the long-term intrinsic value of the Company following a sharp decrease in its stock price in the second half of 2018. The Committee’s decision to utilize an elevated $4.00 per share stock price for determining

 

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equity award values also had the effect of reducing the CEO’s and other NEOs’ target total direct compensation (“TDC”), as illustrated in the below table.

 

     Intended Target TDC Comparison  
     2018      2019(1)      % Decrease  

Newport

   $ 6,245      $ 5,065        (18.9 )% 

Reich

     3,300        2,829        (14.3 )% 

Vasquez

     1,935        1,636        (15.5 )% 

Alter

     1,280        1,125        (12.1 )% 

Lauschke

     948        877        (7.5 )% 
  

 

 

    

 

 

    

 

 

 

Total

   $ 13,708      $ 11,532        (15.9 )% 

 

(1)

Equity values divided by $4.00 stock price despite average of high and low stock price on the grant date of $2.66

Provided below in turn are summaries of the Committee’s considerations as to each of the components of the 2018 equity awards to the NEOs: performance shares, stock options and restricted stock.

Performance Share Awards – Equity

Performance share grants are an important element of an NEO’s annual compensation package because they closely align the long-term interests of the NEOs and our stockholders by directly linking the performance of our common stock over a three-year performance period to the number of shares, if any, ultimately earned by an NEO. Each grant of a performance share award is expressed as a target number of shares of our common stock. The number of shares of common stock, if any, actually earned by and issued to the NEOs under a performance share award will be based upon our performance over the applicable performance period. By way of example, the performance share awards to be earned by the NEOs for 2018 were granted in January 2016 and are based on the performance period beginning on January 1, 2016 and ending on December 31, 2018. Depending upon our performance during the period, an NEO ultimately may earn from 0% to 150% of the target number of shares granted. The performance categories used to determine how many performance shares ultimately will be earned and issued are:

 

   

Relative Total Stockholder Return (“Relative TSR”), defined as share price appreciation plus reinvested dividends, if any, during the performance period relative to the total stockholder return during that same period of the companies in the Standard & Poor’s 400 Midcap Index; and

 

   

Stock Price Growth Rate (“CAGR”), defined as the compounded annual growth rate of the price of our common stock over the performance period, using as the base the average closing price of our common stock for the last 20 trading days of the year immediately preceding the start of the performance period, then comparing that base price with the average closing price of our common stock for the last 20 trading days of the final year of the performance period.

One-half of the total target number of shares awarded may be earned based on the Relative TSR performance and the other half may be earned based on the CAGR performance. The Committee chose the Relative TSR metric because it facilitates a comparison between the growth rate of our common stock over time and a broad-based market index, the S&P Midcap 400 (which the Committee has since changed to the VanEck Steel Vectors ETF, which is more reflective of our peers’ and industry performance, as discussed below). The Committee chose the CAGR metric as an objective measure of the value created for stockholders over time. The Committee determined that the collective use of the Relative TSR and CAGR as performance metrics balanced the two absolute and relative metrics, both being recognized measures that are aligned to create stockholder value.    

 

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For each performance category, the Committee established threshold, target and maximum payout levels, as follows:

 

Payout (Stated as a % of

Category’s Target Shares)

   Total Stockholder
Return
     Annual
Stock Price
Growth Rate
 

Threshold (50%)

     25th percentile        5.0

Target (100%)

     50th percentile        7.5

Maximum (150%)

     75th percentile        10.0

If the threshold performance level is not achieved in a performance category, then none of the target shares related to that category will be earned. Straight-line interpolation applies for performance between the threshold/target and target/maximum performance levels for each category.

In January 2018, the Committee eliminated the absolute stock price CAGR metric for performance shares and awards will be earned solely based on Relative TSR to increase the emphasis on relative performance. The Committee determined that evaluating our stock price performance on this basis was a more “apples to apples” comparison of how well we are driving stockholder value compared to companies facing similar industry conditions and against whom we compete for business, investors and employees, among other things. This change became effective beginning with the performance share awards for the 2018–2020 performance period. In addition, the Committee chose the VanEck Steel Vectors ETF as the index for comparison purposes, since it includes many of our competitors, as well as other mining and metals companies whose businesses are impacted by most of the same key drivers as our own. The Committee determined that measuring our relative stock performance against the performance of this index would be a more accurate indicator of our relative performance than the broader S&P Midcap 400 index, against which we measured our relative stock performance in prior years.

Stock Option Awards

The Committee considers stock option awards to constitute performance-based compensation, as options generally have a value to the grantee only if the market price of our stock increases above its price on the date the option was granted and the grantee remains in our employment for the period required for the option to become exercisable. This provides an incentive for the grantee to remain employed with us and to take actions that, over time, are intended to enhance the value of our stock. An exception to the requirement of continued employment is made in the event of death, disability, involuntary termination without cause or retirement. For each NEO, stock options are a part of the determination of the NEO’s overall compensation package for that year. All options granted to the NEOs and other employees must be exercised within a ten-year period from the grant date and typically vest in three equal installments on the first, second and third anniversary of the grant date.

Under the terms of the Stock Plan, the exercise price for a share of our common stock underlying an option may not be less than the fair market value of our stock on the date on which such option was granted. It has been the uniform practice of the Committee to establish an option exercise price equal to the fair market value of the underlying common stock. It is both the policy and practice of the Committee only to grant options as of the date of the meeting at which the grants were made. This typically occurs at the Committee’s regularly-scheduled January meeting. Generally, the Committee only grants options at a meeting other than the January meeting when an employee is being promoted (e.g., to a new officer position) or is first hired. We have not had, and do not have, a practice of backdating stock options. In addition and as noted above, under the terms of the Stock Plan, the price of an option shall not be less than the fair market value of the shares on the date of the grant. Neither the selection of Committee meeting dates nor option grant dates is timed in any way to try to maximize gain or manipulate the price of an option.

 

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Restricted Stock Awards

Restricted stock generally has a value for an NEO only if the NEO remains in our employment for the period required for the stock to vest, thus providing an incentive for the NEO to remain employed with us. However, an exception to the requirement of continued employment occurs with respect to death, disability or retirement. Vesting occurs immediately upon death or disability. Upon qualification for retirement, the restricted stock will continue to vest in the normal course after the date of retirement.

Restrictions on grants of common stock to our employees, including our NEOs, typically will lapse in three equal installments on the first, second and third anniversaries of the date of the award. All of the restricted stock grants to the NEOs occurred in January 2018 and vest in accordance with this typical schedule.

Graphic Illustration of 2018 Compensation Earned by the CEO and Other NEOs

The charts below set forth the various components of compensation actually received for 2018 performance by the CEO and for the other NEOs, as a group. The components of the CEO’s and the NEOs’ respective compensation packages classified as performance-based compensation include the following: (i) actual incentive payments earned under the Annual Plan for 2018; (ii) actual incentive payments earned under the Long-Term Plan for the three-year performance period ending in 2018; (iii) the grant date fair value of stock option awards made in 2018; and (iv) the value of performance share awards for the three-year performance period ending in 2018. The components of each NEO’s compensation package that are not classified as performance-based compensation include the following: (1) base salary paid in 2018; (2) the grant date value of restricted stock awards made in 2018; and (3) the value of all other compensation paid in 2018. These charts demonstrate that 73% of the compensation earned by the CEO for 2018 was comprised of performance-based compensation, and that 68% of the compensation earned by the other NEOs for 2018 was comprised of performance-based compensation.

 

 

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Data Used for Charts Above

 

    Base Pay1     Restricted
Stock2
    Other
Comp1
    Total Non-
Performance-
based
    Maximum
Annual
Incentive
Plan2
    Maximum
Long-
Term
Plan2
    Stock
Options2
    Maximum
Perfor-
mance
Shares3
    Total
Perfor-
manced-
based
    Total
Potential
 

Newport

  $ 950,000     $ 968,829     $ 86,932     $ 2,005,761     $ 2,375,000     $ 2,280,000     $ 1,010,944     $ 385,758     $ 6,051,702     $ 8,057,463  

Reich

  $ 750,000     $ 333,650     $ 63,203     $ 1,146,853     $ 1,500,000     $ 1,500,000     $ 347,871     $ 117,189     $ 3,465,060     $ 4,611,913  

Vasquez

  $ 475,000     $ 233,358     $ 41,764     $ 750,122     $ 760,000     $ 712,500     $ 243,402     $ 67,599     $ 1,783,501     $ 2,533,623  

Alter

  $ 400,000     $ 106,847     $ 43,979     $ 550,826     $ 560,000     $ 520,000     $ 111,290     $ 40,977     $ 1,232,267     $ 1,783,093  

Lauschke

  $ 325,000     $ 66,861     $ 43,382     $ 435,243     $ 422,500     $ 422,500     $ 69,646     $ 35,235     $ 949,881     $ 1,385,124  

 

(1)

From Summary Compensation Table for 2018 at page 82.

 

(2)

From Grants of Plan-Based Awards Table at page 85.

 

(3)

The value of the performance shares is included in footnote 2 to Summary Compensation Table, performance share grants awarded in January 2016.

 

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What pension, post-termination and other benefits are provided to Executive Officers?

Key Takeaways: We have two active supplemental retirement plans, the SERP and ERIP (as defined below), for our Executive Officers and each Executive Officer participates in one of these plans. The SERP and ERIP are now locked. In January 2018, the Committee established a new, enhanced defined contribution plan, pursuant to which we may make a contribution equal to up to 10% of the participant’s base salary and annual incentive compensation. In addition, we have entered into severance agreements and change-of-control agreements with each of the Executive Officers that provide post-termination benefits. None of those agreements include terms providing for “single triggers” or “gross up” payments.

Discussion:

Pension and Other Retirement Benefits

Non-Contributory Pension Plan

Prior to January 31, 2009, our full-time, non-represented salaried employees, including our then-employed NEOs, participated in a qualified benefit plan known as the Non-Contributory Pension Plan. Effective January 31, 2009, however, no new participants were allowed to enter the Non-Contributory Pension Plan and all benefit accruals under the plan for existing participants were frozen. For those who entered the Non-Contributory Pension Plan prior to January 31, 2009, retirement benefits are calculated using one of two formulas: (i) a cash balance formula, or (ii) a final average pay formula. Eligibility for coverage under a particular formula is typically determined by the date on which a participant commenced employment with us. The compensation taken into account in determining benefits under either formula is subject to the compensation limits imposed by the Internal Revenue Code. A description of the terms of the Non-Contributory Pension Plan, including the formulas used to calculate a participant’s retirement benefits, is set forth in footnote (1) to the Pension Benefits Table beginning at page 90.

Supplemental Retirement Plans

We have two active supplemental retirement plans for our Executive Officers and a new supplemental thrift plan enacted by the Committee and approved by the Board in January 2018 (though this new plan has no participants yet). The Committee has determined that the supplemental retirement plans provide a retirement benefit that is a key competitive element of the overall compensation package and, therefore, important to recruiting and retaining key management members. Certain of our existing Executive Officers, including two of our NEOs, are eligible to participate in the SERP, which is an unfunded nonqualified defined benefit plan. In March 2014, at the Committee’s recommendation, the Board closed the SERP to new participants and replaced it for future Executive Officers with the ERIP, which is similar to the SERP but provides significantly reduced benefits to participants. In January 2018, at the Committee’s recommendation, the Board closed the ERIP to new participants and replaced it with a new supplemental thrift plan for future Executive Officers with even further reduced benefits. The terms of the SERP, ERIP and new supplemental thrift plan are described below.

SERP (locked as of March 2014)

Two of the NEOs—Messrs. Newport and Reich, our CEO and President and COO, respectively—are participants in the SERP. The SERP provides (1) a “make up” of qualified plan benefits that were denied as a result of limitations imposed by the Internal Revenue Code, and (2) supplemental benefits to vested participants. As part of its annual review of retirement benefits provided to Executive Officers, including the NEOs, the Committee has determined that the retirement benefit provided by the SERP continues to be a key element of a competitive compensation package for the Executive Officers who are participants in the plan and, therefore, important to retaining those individuals.

 

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The benefits for participants in the SERP, including the NEOs, vest under a form of graded vesting. More specifically, a participant will vest in 50% of his or her accrued benefit after a minimum requirement of five years of service as an officer with us and as a participant in the SERP, and in an additional 10% of such benefit for each year of service as our employee in addition to such five years, up to 100% vesting after ten years of total service. Vesting also will occur upon the effective date of a change of control (as defined in the SERP). In addition, vesting occurs upon the participant’s death or disability with respect to a participant who has completed at least five years of service with us. The form of payment is a lump sum payment to be made within 30 days after the later of attainment of age 55 or termination of employment, subject to a six-month delay for specified employees, including the NEOs. A participant whose employment with us terminates after his or her benefit has vested, but before the participant reaches the age of 60, is entitled to an early retirement benefit, reduced to its actuarial equivalent based on the participant’s age.

Benefits paid under the SERP are subject to an offset for any benefit received under our qualified defined benefit plan, as well as the actuarial equivalent of certain company-provided vested benefits accumulated under the Thrift Plan. A participant’s benefit under the SERP, prior to giving effect to such offset, is equal to the greater of: (1) 50% of his or her average covered compensation (base salary and incentive awards under the Annual Plan) during the employee’s highest three calculation years of eligible earnings over the participant’s last ten years of consecutive service, or (2) the participant’s benefit under the applicable qualified plan in which he or she participates, without regard to the limitations imposed by the Internal Revenue Code. The present value of accumulated benefits for each of the NEOs under the SERP is set forth in the Pension Benefits Table beginning on page 90.

ERIP (locked as of January 2018)

Three of the NEOs—Messrs. Alter, Lauschke and Vasquez—are participants in the ERIP, which is also designed to provide a competitive element of the overall compensation package to attract and retain key management members, though at a lower level of benefits than the SERP. The ERIP provides (1) a “make up” of qualified plan benefits that were denied as a result of limitations imposed by the Internal Revenue Code, and (2) supplemental benefits to vested participants.

The vesting and payment terms for participants in the ERIP are substantially the same as those described above for the SERP.

The benefits paid under the ERIP are similar to, but significantly lower than, those provided under the SERP. Thus, a participant’s benefit under the ERIP, prior to giving effect to such offset, is equal to the greater of: (1) 40% of his or her average annual base salary during the employee’s last three years of consecutive service, plus the annual average of any incentive awards earned by the participant for the last ten consecutive annual performance periods under the Annual Plan; or (2) the participant’s benefit under the qualified plan in which he or she participates, without regard to the limitations imposed by the Internal Revenue Code.

In January 2018, the Committee locked the ERIP to new participants. Our future Executive Officers will be eligible to be named to participate in the new supplemental thrift plan recommended by the Committee and approved by the Board in January 2018.

Supplemental Thrift Plan (for new Executive Officers)

In January 2018, the Board approved the new supplemental thrift plan for future Executive Officers. As such, this new plan does not yet have any participants. The provisions of the new supplemental thrift plan were implemented by inserting those provisions into our already-existing Supplemental Thrift Plan.

The benefits for participants in the new plan will vest under a form of graded vesting. A participant will vest in 50% of his or her accrued benefit after a minimum requirement of three years of

 

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service as an Executive Officer with us and as a participant in the plan, and in an additional 10% of such benefit for each year of service as an employee of ours in addition to such three years, up to 100% vesting after eight years of total service. Vesting also will occur upon the effective date of a change of control (as defined in the Supplemental Thrift Plan). In addition, vesting occurs with respect to a participant who has completed at least five years of service with us upon the participant’s death or disability.

A participant in the new plan will receive an annual supplemental retirement contribution from us equal to up to 10% of the sum of (i) the participant’s annual base salary and (ii) the total annual and long-term incentive awards earned by the participant for the subject year.

The Committee recommended the new thrift plan to replace the ERIP based on its determination, with input from its executive compensation consultant, that the new plan is more in line with current executive compensation market practices for supplemental retirement benefits. The Committee also believes that the structure of the new plan will be more effective than the ERIP for retaining Executive Officers.

Thrift Plan and Supplemental Thrift Plan

The Thrift Plan is a qualified retirement plan under Section 401(k) of the Internal Revenue Code. It provides for matching contributions for employee contributions up to 5% of base salary and additional company contributions, a portion of which are guaranteed and a portion of which are performance-based and dependent upon our net income. At the time that we locked and froze our Non-Contributory Pension Plan (see discussion above), we amended our Thrift Plan to add an automatic contribution by us to a participant’s account in the Thrift Plan. Effective January 31, 2009, the Thrift Plan provides for us to make a contribution to the account of each participant in the Thrift Plan equal to 3% of the participant’s base salary, whether or not the participant makes an elective contribution to the Thrift Plan. This 3% contribution is in addition to the matching contributions described above with respect to the participant’s elective contributions and the potential performance-based supplemental contributions that we may make in the event that we achieve the threshold level of net income for the quarter, as discussed below. All such contributions are subject to the compensation limits imposed by the Internal Revenue Code.

The Thrift Plan also provides for potential performance-based supplemental contributions by us. These supplemental contributions are available to employees generally, including the NEOs. Employees who contribute at least 5% of their gross income to the Thrift Plan (the “Basic Contribution”) are eligible for the full amount of the performance-based supplemental contributions. Whether these contributions are made and the quantum of the contribution are based on our quarterly net income. The amount of the supplemental contribution, expressed as a percentage of the Basic Contribution, varies as follows:

 

Quarterly Net Income

 

  

Amount of AK Steel Supplemental Contribution 

 

$5 million

   10% of Basic Contribution

$10 million

   20% of Basic Contribution

$15 million

   30% of Basic Contribution

$20 million

   40% of Basic Contribution

$25 million

   50% of Basic Contribution

In addition, if our quarterly net income is greater than $30 million, an additional 1% of eligible earnings will be contributed for each incremental $30 million of quarterly net income. The maximum performance-based supplemental contribution in any quarter is 100% of the Basic Contribution.

 

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During 2018, we achieved net income and made supplemental contributions to eligible employees, including the NEOs, in each quarter of the year. The total amounts of these performance-based supplemental contributions are set forth in the notes to the Summary Compensation Table on page 82.

The Supplemental Thrift Plan is an unfunded, nonqualified retirement plan. It provides for matching contributions with respect to base salary that may not be taken into account under the Thrift Plan due to limits on earnings imposed by the Internal Revenue Code. The Supplemental Thrift Plan thus provides a vehicle to maximize matching contributions that otherwise would not be eligible for the Thrift Plan due to the Internal Revenue Code’s compensation limits.

Any member of our Management, including an NEO, is eligible for participation in the Thrift Plan, but participants in the Supplemental Thrift Plan must be selected by the Committee. For 2018, the participants in the Supplemental Thrift Plan included all of the NEOs. The contributions under these plans for 2018 are set forth in the Nonqualified Deferred Compensation Table on page 92. In 2018, a portion of our contributions to these plans were fixed contributions and the remainder were performance-based contributions.

Executive Deferred Compensation Plan

We have an Executive Deferred Compensation Plan (the “Deferred Plan”). The Deferred Plan is an unfunded nonqualified deferred compensation arrangement. In 2018, none of the NEOs chose to participate in the Deferred Plan.

Post-termination Benefits

Severance and Change-of-Control Agreements

We have entered into severance agreements and change-of-control agreements with each of the NEOs that provide certain post-termination benefits. The descriptions of those agreements in this Proxy Statement are qualified in all respects by reference to the forms of those documents filed with the SEC. The current forms of the severance agreement and the change-of-control agreement were filed as exhibits 10.8 and 10.9, respectively, to our 2016 Annual Report on Form 10-K filed with the SEC on February 17, 2017. No NEO has executed a new form of change-of-control or severance agreement since that time.

For each of the NEOs, their initial severance and change-of-control agreements each had or have a five-year term (the remaining term depends how long ago each NEO was appointed as an Officer), and renew automatically thereafter on a year-to-year basis, unless written notice of non-renewal is given by either party at least 90 days prior to the expiration of the term.

We enter into severance agreements with our NEOs because they promote our and our stockholders’ interests by, among other things:

 

   

Encouraging a release of claims by the terminated NEO and thereby avoiding the risk and financial exposure of employment litigation.

 

   

Ensuring that for one year after termination of employment, the NEO:

 

   

will not compete against us;

 

   

will not solicit any of our employees to resign his or her employment; and

 

   

will cooperate with respect to various matters in which the NEO was personally involved prior to the NEO’s employment termination.

 

   

Securing an agreement by the NEO to arbitrate all legally arbitrable claims arising not only from the severance agreement, but also from the NEO’s employment relationship with us.

 

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We enter change-of-control agreements with our NEOs because they align our and our stockholders’ interests by, among other things:

 

   

Obtaining the same covenants and commitments as described above in our severance agreements.

 

   

Mitigating an NEO’s concerns about personal job security and financial well-being in the event of a change-of-control, thereby eliminating consequences that might prevent the NEO from providing objective advice and information to the Board and stockholders regarding a proposed change-of-control, and helping to ensure that Management stays intact before and during a proposed change-of-control transaction.

The Committee annually reviews the terms of our severance and change-of-control agreements to evaluate whether they continue to promote our interests as noted above, are appropriate and competitive under the then-existing circumstances and reflect best practices for our industry and large public companies generally.

Severance Agreements – Overview of Terms

Under our severance agreement with the NEOs, an NEO who voluntarily terminates employment or whose employment is terminated involuntarily for cause would not receive any severance benefits associated with such termination. An NEO who is terminated involuntarily without cause would receive at a minimum a lump sum payment equal to the NEO’s base salary for a period of six months. In addition, if the NEO executes an agreement releasing us from any liability for claims relating to the NEO’s employment with us, the NEO also is entitled to receive:

 

   

an additional lump sum severance payment equal to 12 months of base salary;

 

   

a lump sum payment based upon the NEO’s assigned target amount under our Annual Plan and a pro-rated payment of any Annual Plan award actually earned for the year in which the termination occurs; and

 

   

continuing coverage under our benefit plans, including life, health and other insurance benefits, for 18 months.

Change-of-Control Agreements – Overview of Terms

Each NEO typically is entitled to severance payments and other benefits under the NEO’s change-of-control agreement if, within 24 months following a change-of-control, the NEO’s employment with us is involuntarily terminated without cause or the NEO voluntarily terminates employment with us for “good reason.”

For each NEO, the base severance benefit is a lump sum payment equal to the NEO’s base salary for a period of six months. In addition, if the NEO executes an agreement releasing us from any liability for claims relating to employment with us, the NEO would be entitled to receive:

 

   

an additional lump sum severance payment, equal to 18 months of base salary;

 

   

a lump sum payment based upon the NEO’s awards under our Annual Plan equal to two times the greatest of (1) the NEO’s assigned Annual Plan target amount for the calendar year in which the termination occurs, (2) the actual Annual Plan payout for the calendar year immediately preceding the calendar year in which the termination occurs, or (3) the average of the Annual Plan payouts for the three calendar years immediately preceding the calendar year of termination, reduced in each instance by any amount otherwise paid or payable under the Annual Plan with respect to the preceding calendar year, plus a prorated Annual Plan payout at the maximum level for the portion of the then-current calendar year prior to date of termination;

 

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a lump sum payment based upon the NEO’s awards under our Long-Term Plan equal to the bonus payment for any completed performance period under the Long-Term Plan that has not been paid as of the date of termination (which amount shall not be less than it would be if calculated at the assigned target amount under the Long-Term Plan), plus a prorated Long-Term Plan payment at the target level for all incomplete performance periods as of the date of termination;

 

   

continuing coverage under our benefit plans, including life, health and other insurance benefits, for 24 months;

 

   

additional service credits toward retiree medical coverage (ranging from two to three years);

 

   

the immediate vesting of all restricted stock awards to the NEO under our Stock Plan and the lapse of all restrictions on such awards; and,

 

   

the right, for a period of three years, to exercise all stock options awarded to the NEO under the Stock Plan without regard to any vesting period required by the Stock Plan (but subject to expiration of the original ten-year period for the option to be exercised).

Specific Payments and Benefits under Severance and Change-of-Control Agreements

Each of the NEO’s change-of-control agreements contains a “double trigger”, which provides that the NEO is entitled to the payments and benefits under the agreement if, within 24 months following our change-of-control, the Executive Officer’s employment with us is involuntarily terminated without “cause” or the Executive Officer voluntarily terminates employment with us for “good reason.”

None of the severance or change-of control agreements include a “gross-up” provision that would require a payment to the NEO if the NEO becomes subject to the federal excise tax on “parachute payments.”

The specific circumstances that would trigger the payments and other benefits under the severance agreements, the estimated payments and benefits that would be provided in each covered circumstance for each NEO, how the payments and benefits are determined under such circumstances and all material conditions and obligations applicable to the receipt of the payments and benefits are set forth in the Potential Payments Upon Termination or Change-of-Control discussion beginning on page 93.

Limited Perquisites and Other Personal Benefits

Each of the NEOs receives a limited number of perquisites and other personal benefits that are customary for Executive Officers of similarly situated companies and provide a competitive overall compensation package. These consist principally of reimbursement for tax planning services, financial planning services, and mandatory physical evaluations. Neither the CEO nor any of the other NEOs is permitted personal use of our airplane. The limited perquisites and personal benefits provided to each NEO are disclosed in the “All Other Compensation” column of the Summary Compensation Table on page 82. The NEOs pay all taxes associated with these perquisites and other personal benefits and their compensation is not “grossed up” to cover such taxes.

Other Employee Benefit Plans

Each of the NEOs also participates, or is eligible to participate, in various employee benefit plans generally available to all employees on the same terms and conditions. These include the normal and customary programs for death and disability benefits, life insurance, health insurance, prescription drug insurance, dental insurance, vision insurance, health savings accounts (including variable performance-based supplemental contributions by the company if we exceed the applicable annual net income threshold), short- and long-term disability insurance, pension benefits (for certain NEOs), educational assistance and matching gifts for charitable contributions from the AK Steel Foundation.

 

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What is our Policy on Deductibility of Executive Compensation?

Key Takeaways: Although the 2017 Tax Cuts and Jobs Act included significant changes to Section 162(m), the Committee does not expect any significant changes to the manner in which it structures and evaluates executive compensation decisions, which are driven not by tax deductibility considerations, but rather, by the program’s core pay-for-performance philosophy.

Discussion: Section 162(m) of the Internal Revenue Code generally places a $1,000,000 limit on the deductibility for federal income tax purposes of the annual compensation paid to a company’s CEO and each of its other three most highly compensated Executive Officers (excluding the CFO, prior to 2018). However, prior to 2018, “qualified performance-based compensation” under Section 162(m) was exempt from this deductibility limitation. Qualified performance-based compensation was compensation paid based solely upon the achievement of objective performance goals, the material terms of which were approved by the stockholders of the paying corporation.

Prior to 2018, although the Committee’s principal motivation in structuring executive compensation was (and remains) aligning the interests of Management with those of the stockholders, the Committee also considered the anticipated tax treatment when determining executive compensation. Thus, the Committee routinely sought to structure our executive compensation program in a way that preserved the deductibility of compensation payments and benefits. That said, in order to maintain the flexibility to compensate NEOs in a manner designed to promote the compensation program’s primary objectives, the Committee did not follow any strict policy that all executive compensation must be deductible under Section 162(m).

The 2017 Tax Cuts and Jobs Act repealed the exception to Section 162(m) for performance-based compensation for tax years beginning after December 31, 2017, subject to certain transition and grandfathering rules. In addition, the rules provide, among other things, that the CFO will be included as a “covered employee”. Despite the loosening of the guidelines under Section 162(m), the Committee continues to believe that most of our NEOs and Executive Officers’ compensation should be performance-based and incentivize the creation of long-term shareholder value. As such, the changes to Section 162(m) under the recent tax reform law did not significantly impact the design of our compensation program and we do not expect it to do so for the foreseeable future.

 

III.

Shareholder outreach program and consideration of stockholder “say-on pay” voting results

Shareholder engagement

We conduct two extensive, targeted outreach campaigns during the year, beyond our regular, ongoing investor relations program. In each outreach effort, we invite approximately 30 of our largest stockholders to engage is a direct dialogue with us. Although we accommodate any permissible topics that any participating stockholder wishes to address, these exchanges typically include discussions on executive compensation, corporate governance, and more recently, ESG matters. The shareholder outreach campaigns are discussed in more detail on page 57.

Committee consideration of 2018 “say on pay” vote

At our 2018 Annual Meeting, our stockholders agreed with the Board’s recommendation to continue this annual practice. At the Annual Meeting in May 2018, approximately 95% of the shares cast were in favor of a resolution to approve the compensation of the NEOs as disclosed in our 2018 Proxy Statement. The Committee considered the feedback it received through the stockholder engagement program, along with the results of the voting by stockholders on our 2017 say-on-pay proposal, at the Committee’s January 2018 meeting at which it established the 2018 compensation packages for the NEOs. On an ongoing basis, the Committee also considers the policies and recommendations on executive compensation of our largest stockholders, proxy advisory firms, and key third-party stakeholders, such as the Investor Stewardship Group, a collective of some of the largest U.S.-based institutional investors and global asset managers.

 

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MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE REPORT

The Management Development and Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with Management and, based upon such review and discussion, the Management Development and Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

THE MANAGEMENT DEVELOPMENT

AND COMPENSATION COMMITTEE

Ralph S. Michael, III, Chair

Sheri H. Edison

James A. Thomson

Arlene M. Yocum

 

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CEO PAY RATIO CALCULATION

In August 2015, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd–Frank Act”), the SEC adopted a rule requiring annual disclosure of the ratio of the median employee’s annual total compensation to the total annual compensation of the principal executive officer (“PEO”). Our PEO is Mr. Newport, our CEO. The stated purpose of the newly required disclosure is to provide a measure of the equitability of pay within the organization. We believe our compensation philosophy and process yield an equitable result and the Management Development and Compensation Committee monitors the relationship between the pay of our executive officers and the pay of our non-executive employees.

We made a new determination of the median employee for 2018 to reflect the inclusion in our employee pool of all employees of Precision Partners, which we acquired in August 2017, many of whom are based in Canada. In addition, for 2018, we have also included in our employee pool all employees based outside of the United States. Using this expanded pool of employees, we identified the new median employee by examining the 2018 Form W-2 compensation for all employees, excluding Mr. Newport as CEO, who were employed by us on October 1, 2018 (whether employed on a full-time, part-time, or seasonal basis). We adjusted compensation for employees who started during the year by assuming they started on January 1, 2018, and excluded employees on leave. We did not make any other assumptions, adjustments, or estimates with respect to compensation other than converting compensation paid to foreign based employees to U.S. dollars using applicable exchange rates. After identifying the median employee, we calculated annual total compensation for such employee using the same methodology we use for our NEOs as set forth in the 2018 Summary Compensation Table on page 82. Our CEO’s 2018 total compensation was $12,319,274 (which includes $3,729,492 of Change in Pension Value, which is not a component of compensation awarded annually but rather is a mathematical calculation of the actuarial change in value of the CEO’s retirement benefit for which he received no cash benefit in 2018). Our 2018 median employee’s compensation was $86,804, resulting in a ratio of 142 to 1. We also utilized an alternative measurement that (i) for the CEO, excludes his aforementioned Change in Pension Value and, (ii) for the CEO and the median employee, includes the average cost of a family healthcare plan for our salaried employees, which is the same plan available to Mr. Newport and the median employee. As so adjusted, Mr. Newport’s 2018 total compensation was $8,600,292, and the median employee’s 2018 total compensation was $97,314. This alternative measurement, which is provided solely for additional context and is not intended to replace the aforementioned required pay ratio disclosure, results in a pay ratio of 88 to 1.

Our calculation of the pay ratio may be different than the pay ratio of other public companies as a result of different methodologies used to determine the pay ratios. As a result, we would discourage the use of the ratios reported above as a basis for any comparison between companies.

 

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SUMMARY COMPENSATION TABLE FOR 2018

The table below summarizes the total compensation paid to or earned by each Named Executive Officer (“NEO”) for the years ended December 31, 2018, 2017, and 2016:

 

  Name and

  Principal Position

  Year     Salary
($)
    Bonus
($)(1)
    Stock
Awards
($)(2)
    Option
Awards
($)(3)
    Non-
Equity
Incentive
Plan
Compen-
sation
($)(4)
    Change in
Pension
Value and
Nonqualified
Deferred
Compen-
sation
Earnings
($)(5)
    All Other
Compen-
sation
($)(6)
    SEC Total
($)
    Total Not
Including
Change in
Pension
Value
($)(7)
 
                   

  Roger K. Newport

 

   

 

2018

 

 

 

  $

 

950,000

 

 

 

  $

 

0

 

 

 

  $

 

2,337,269

 

 

 

  $

 

1,010,944

 

 

 

  $

 

4,204,637

 

 

 

   

 

$3,729,492

 

 

 

  $

 

86,932

 

 

 

  $

 

12,319,274

 

 

 

  $

 

8,589,782

 

 

 

Chief Executive Officer

 

   

 

2017

 

 

 

   

 

950,000

 

 

 

   

 

0

 

 

 

   

 

1,973,013

 

 

 

   

 

950,139

 

 

 

   

 

2,255,131

 

 

 

   

 

7,746,598

 

 

 

   

 

65,212

 

 

 

   

 

13,940,093

 

 

 

   

 

6,193,495

 

 

 

   

 

2016

 

 

 

   

 

850,000

 

 

 

   

 

0

 

 

 

   

 

505,470

 

 

 

   

 

253,111

 

 

 

   

 

2,515,519

 

 

 

   

 

1,771,220

 

 

 

   

 

49,087